Chart of the week: A big question for Lloyds Bank shareholders

Lloyds shares have been a dream for swing traders, but they've just hit technical analyst John Burford's major target, forcing him to take another look.

Lloyds Banking Group follows my roadmap to a T

I last covered this share on 13 August - Will Lloyds ever recover? - and this is a good time to review the position as it has hit one of my major targets that I set months ago.

Many investors – private and institutional alike – hold this share as a genuine investment. That is, their main interest is in the generous dividends that have been paid for many years. They are not so bothered by the share price level per se because they are confident that dividends can be maintained in any environment.

But with the shares heading south, can this assumption be justified any longer?  I am confident that if the share prices falls much further, many will question it – and sell.

•    Chart of the week: Will Lloyds ever recover?

•    The week ahead: Lloyds Bank, Barclays, RBS

•    Why Lloyds Bank shares are in danger

But for swing traders like myself, it has been a dream to trade because early on, I examined the very long-term chart and concluded the odds for a decent recovery were slim and the path of least resistance was down. This is the chart I posted on 26 March:

And this is what I wrote then:

"As I pointed out at the time, the pink zone at 72–73 has been very strong resistance (and support till early 2016). And in late January, the shares had tested that zone (again) and was turned back (again).  Interestingly, that was the precise date when the Dow made its all-time high.

"That zone is also the Fibonacci 62% retrace of the entire decline – another very strong area of resistance."

That observation set the 72p level at an excellent area to short in anticipation of the renewed downturn that had been in effect since the high set way back in 1999.  Here is the monthly chart I posed back in March (dead cat added for emphasis):

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

In other words, even given the huge bank bail-outs with QE funny money, rampant house price inflation and vigorous equity bull markets, Lloyds shares have fallen dramatically. Does not this fact give bulls pause for thought?

And the 'bounce' off the post-Crash 2009 lows has been exceptionally weak – more like a dead cat bounce, in fact. This is a very bearish picture – and here is the updated weekly chart:

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

And last week, my 57p target was attained.  That is a 22% decline off the March 72p high. And it has reached my pink trendline drawn off the June 2016 low at 47p.  Nice.

And this presents one of the most difficult challenges for a trader.  It has reached a major target set long ago, so what is the best strategy here?  I know it's a nice problem to have, but making an unwise decision here could cost you money – and that is how we keep score as traders.

In fact, I believe there is no 'right' or 'wrong' strategy here.  Very bearish traders would just sit tight and do nothing.  Very cautious traders would grab the profits and run.  Middling traders would take some profit here and sit on the remainder.

What would you do?

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.