Chart of the week: Big test coming up for Lloyds shares

Lloyds heads south, as forecast

On 5 June I covered Lloyds because it is one of the banks I am most bearish on - and I believe many of my readers would find it useful to see my analysis which is based not on projected dividend yields or other 'fundamental' considerations, but on my Tramline methods.

Most professional money managers rely on a 'story' to justify taking a particular stance - either bullish, bearish or neutral. But, in fact, what they are doing is herding through an unconscious feeling that permeates the group as they all talk to each other and exchange their own research notes. Some call this 'Groupthink'.

And for many reasons, they tend to take a common stance on each market - and with Lloyds, it is the 'dividend yield' story that they are using to rationalize their buying (which they would do whatever the bullish rationale they would come up with).

As I explained then, most mainstream opinion on Lloyds is very bullish. In fact, I quoted two prominent money managers that are euphoric on the shares.

Last time I quoted 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 money manager: "This is just the beginning for the Lloyds rally" (March 2017)

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

Nuts or not, I stated that the rally to the 73.5p level on May 25 was a high probability turning point and the shares would then very likely head down.

This is what I wrote: "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 70.20 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."

So, let's see how my prediction is working out - here is the updated daily chart.

On this chart, I have two excellent tramline pairs working. The rally to the 73.5p level on May 25 planted a lovely kiss on the lower pink tramline and on a momentum divergence as shown. That is a clear high-probability signal that the market had reached its high and the next big move was down.

And the decline was sharp off that kiss. In fact, it was a scalded cat bounce that typically follows such a kiss. It's as if the underside of the tramline is acting as a magnet, drawing prices to it and then switches poles at the kiss to vigorously repel the market.

The sharp decline produced a spike low at 65p right on the lower blue tramline on June 15, with an astonishing display of accuracy! It is currently trying to correct the sharp decline, but a clear break of the lower tramline in the 65p area would confirm the major downtrend and set the course for a test of the 62p level.

But with the shares currently 7p (almost 10%) off their high, many bulls must be wondering what is happening.

Is it possible the bullish dividend projections may not come to pass? After all, Fintech is making inroads into the profit base of conventional retail banking; traditionally the exclusive domain of the big banks. And will interest rates remain benign for years to come, or will they rise more than expected and deter borrowing?

The other consideration is that we have seen 100 months of this bull market, making it one of the lengthiest bull markets in recent history. When it does turn -as it will - will the financial sector be leading the way down, as it did in the 2007 - 2009 Credit Crunch?

Another major UK bank - Barclays - is likewise in a bear trend and is now trading under the £2 level for the first time since November. I hope to cover this share again soon.