Chart of the week: Why Lloyds Bank shares are in danger

Lloyds shares are in danger

I have been bearish on the banking sector for some time, as regular readers will know. This is a contrary position of course given the very bullish sentiment prevailing, which is partly based on the notion that rising interest rates is good for loan profit margins, all things being equal.

But, as we all know, this is rarely the case. Yes, in an expanding economy, this would be true since loan demand would be growing rapidly (from a low base). Sadly, we are in a very high base.

And with many headwinds to economic growth, including mortgage demand facing a slowdown as extreme house prices are stagnant or falling with sales volumes in sharp decline, all things are not quite equal.

Banks usually make large profits from this sector, but with sales volumes down, competition is fierce for the little business around. Margins are slim on reduced volume. And their cost of funds is rising rapidly (LIBOR trades well over 2%).

Lloyds Banking Group (LLOY) is right at the forefront of these trends, but has been the focus of recent advice from the pundits to buy on the good dividend it currently offers. But dividends are never secure and basing an investment on past dividend performance is risky – sometimes, very risky if the business cycle is turning.

In the current nervous stockmarket environment (the FTSE 100 is off 1,000 points since its high in January), how secure really is the dividend? I have a feeling we shall soon find out – and the stock price will flag that well in advance.

Here is the long term weekly chart:

 Source: interactive investor      Past performance is not a guide to future performance

There are two standout features here: the rock solid resistance at the 74p area that has withstood all attempts at breaking it for over two years. Also, the blue trendline that also has withstood all attempts at breaking below it for almost as long.

Both of these are solid lines of resistance/support and, when one of them breaks, as is inevitable, the move will likely be substantial. The wedge acts like a tightly-wound coiled spring which is suddenly released. Ping!

So which way will it spring – up or down?

The answer to that was found last week when the shares moved well below the blue trendline – here is the daily:


Source: interactive investor      Past performance is not a guide to future performance

That sharp plunge of 5% last week gave the game away following the clean break. We should be now in wave 3 down – and heading for lower levels.

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