Chart of the week: Lloyds shares are still recovering
Bank profits are poised to improve, our chartist believes – as are their share prices.
8th February 2021 13:40
by John Burford from interactive investor
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Bank profits are poised to improve, our chartist believes – as are their share prices.
I last covered Lloyds (LSE:LLOY) in my article of 16 November and painted a bullish picture when the share was trading at around the 33p area. At the time, it was coming off a major low back in September at 24p. So, is my outlook being vindicated?
This was the chart I showed in November:
Source: interactive investor. Past performance is not a guide to future performance.
I had a potentially complete five down, which set the market up for a strong rebound with the huge momentum divergence at the September low. I figured that any break of the blue trendline would confirm the start of a major bull run.
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This is what I wrote in November: “...it seems the odds favour a continuation of the rally, of course punctuated by dips and these I suggest would be worth buying. An important gap has just been closed (just below the wave four high) and usually, the price moves lower after that. If so, that dip would be a great opportunity.”
And here is the chart updated:
Source: interactive investor. Past performance is not a guide to future performance.
As forecast, the shares advanced strongly to the 40p mark in late November and then entered a consolidation phase which provided the buyable dips I had expected in November.
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My best guess is that the rally off the September low is part of a larger three up which will likely terminate either at around the 48p mark or around 52p. I have mentioned previously that UK bank shares’ profits have been hard hit by the low loan margins resulting from the record low short-term rates.
But note that US 10-year Treasury yields are now rising strongly and I expect UK long rates to follow.
Also, headlines were splashed across the media last week that the Bank of England is advising banks to ‘prepare for negative (short term) rates’. While I find that prospect hard to swallow, at least with bank borrowing rates still low and rising gilt yields (with upward pressure on home mortgage rates), bank profits are poised to recover – as are their share prices.
I maintain my bullish stance, and only a sharp decline below the 30p mark would send me back to the drawing board.
John Burford is the author of the definitive text on his trading method, Tramline Trading. He is also a freelance contributor and not a direct employee of interactive investor.
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Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.