Chart of the week: A 'very formidable' barrier for Lloyds Bank shares

It must be heresy to suggest it, but has the Lloyds Banking Group rally run its course? After all, recent comment has been more than bullish - it has been euphoric! A recent article is titled "Is Lloyds now the safest FTSE dividend stock?"

Here is an excerpt: "Its first quarter results, which were published yesterday, show just how successful this restructuring has been.

"The bank's Tier one capital ratio hit 14.3% at the end of the quarter, up from 13.8% at the end of 2016. For the year, management expects capital generation to be "at the top end" of the 170-200 basis points range, which could leave the bank with a capital ratio of more than 15%. And this impressive cash generation is unlikely to end any time soon. Lloyds is planning to cut costs further in the years ahead, targeting a cost-to-income ratio of 45% by 2019, down from 47.1% today, implying wider margins and fatter profits in the years ahead."

It can't get much better to persuade you to buy Lloyds shares than that, can it? Or maybe it can - with Steve Davies, who runs the £1.4 billion Jupiter UK Growth Fund explaining "Why I own £100 million in Lloyds shares".

And here is another: "This is just the beginning for the Lloyds rally" (March 2017).

So with such experts exceedingly bullish, what am I doing advising caution? Am I nuts?

Experience has taught me to regard projections for 'fat profits in the years ahead' with more than a grain of salt. How can anyone make a reliable forecast for next week, let alone years ahead? The projections of economists and pundits of all stripes (save the notable exception of Elliott wave theory adherents) are littered with completely false forecasts.

In fact, this applies when especially confident statements are made about the outlook years ahead. Have they never looked at a price chart? Have they not seen the huge swings both up and down with major turns trapping those with consensus views at just the 'wrong' time? Apparently not.

And that observation is like manna from heaven for true contrarians who can use the sometimes subtle internal signs that markets are turning against mainstream opinion.

So let's take a look at the long-term chart for clues. Here is the weekly:

The shares made a high in May 2015 at the 89p area, but then began a solid bear phase. The PPI mis-selling scandal was in full flight as sentiment turned against UK banks.

Note the decline was a nice 'five down' to the low at 47p - a drop of almost 50%. That is a huge decline for a 'solid' major UK banking share. Contrary to common belief, Lloyds is not a 'boring share' at all!

Then the relief rally got underway in July and, since then, the form is a clear A-B-C three waves (which is always counter-trend). The C wave also sports a textbook five waves, as befits a third wave.

And last week, the shares hit the 73.50p high on a large momentum divergence. This is a very significant spot. Not only is it the Fibonacci 62% retrace of the entire downtrend, but it is also at the region of the wave 4 high of the wave down. This is a typical turning point for relief rallies. Thus, the 73.50p region is a place of very high resistance to further rallies.

And so it is proving with the shares currently trading at 70.20p as it bounces down off that solid resistance area.

The odds are very high that the 73.50p level will represent a very formidable barrier to further gains and the path of least resistance is down for now.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.