Is Lloyds primed for a breakout ahead of government share sale?

As the government prepares to offer private investors discounted shares in Lloyds, what is the outlook for the firm?

Lloyds sign
Source: Bloomberg

Today’s announcement that the government will sell approximately £2 billion of shares to private investors will certainly bring plenty of interest. However, this highlights the key question of whether this represents a good time to buy and what the charts tell us about this major UK bank.

The government has promised a 5% discount over market value alongside a free bonus share per 10 shares bought if held for more than a year (£200 limit per investor). Applications of under £1,000 will be prioritised.

The share sale is just one in a string of sales from the government as it seeks to offload the sizeable stake it took in the firm following the financial crisis. With the government now down to circa 12% ownership, this latest bout of sales is a move closer to complete autonomy for a firm which has by and large managed to get back on the straight and narrow.

From a financial perspective, Lloyds suffered a drop in basic EPS in the June report, falling into negative territory for the first time in a year. However, it is worth noting that the June report has historically underperformed on basic EPS and when looking at the adjusted figure, we have seen it actually rise slightly to 0.05 from 0.02. Elsewhere, market expectations point to a significant rise in net income and operating income for the end of 2015 and 2016. 

Part of the worry regarding interest in the firm is that there is no particular ‘work in progress’ to provide a value proposition. With a solid management framework and no particular overhaul in the pipeline, it seems to be more of a steady dividend story rather than a big mover. However, with the shareprice falling 13% (up from -20%) over the past four months, it is worth understanding whether a temporary blip actually provides us with a likely source of upside in Lloyds shares in the coming months.

The daily chart shows a clear bounce from 72p, following a major selloff in Q3. This area of support has been crucial in the past, with 2014 experiencing a whole host of bounces from the 70p-72p support zone. On this occasion it has coincided with an ascending trendline from April 2014. However, price has not returned to a crucial resistance level, at 78p, which is a confluence of the 27 August high, 50-day SMA and 19 September 2014 high.

With price outside of the Bollinger band at those levels, this seems a likely place for a retracement lower. However, ultimately the question of whether it looks bullish now will be dependent upon the 78p level. A break above 78p brings expectations of a move back towards 82p and even on towards 90p again. As long as price remains below 78p, we seem confined to that same Q3 2014 range.

The bullish scenario seems to be favoured among City analysts, with 15 buy, nine hold and just four sell recommendations.

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