Technical Analysis - A Practical Example: LBS (Brompton Life Banc Split), Consumer Credit, "Sell In May"

Here's an example of how our form of technical analysis works, using LBS (Brompton Life Banc Split) as an example. 

First, please consider this short post from May 31 2012.  What happened after "gold's worst monthly run in over 11 years" and "terrible sentiment for equities"?  The rally we expected happened.  Why did we expect it?  Because the world was bearish, especially on banks, so naturally we recommended a holding made up largely of bank shares noting "we believe it'll outperform gold in the long term if not the short term."

A few gold bugs wrote in with their usual outrage, insults and mockery, all predicting that equities would collapse (especially banks) and that gold would outperform considerably.  This was a widespread belief at the time, not just among hard-core gold bugs.

10 months later, what's actually happened?  After rising 14.5% gold is down to the same level as it was back then.  In stark contrast, LBS bottomed two days after we suggested it and two weeks ago was 50% higher than it was when we called it.  Plus it has paid out a whopping 15% (based on the price when we called it). 

As for banks in general, the market rally thus far was indeed "led by banks".  To name a couple, BAC (Bank of America) rose as much as 76% and GS (Goldman Sachs) 71%.  That's without factoring dividends. 

Now for the practical example of technical analysis.  Why did we turn bullish when we did?  In part purely because of our experience.  Its long-term chart reveals the rest of the answer:

You can see that at the end of May 2012, just before its lows of the past year, it was near the support suggested by the red uptrend line.  That line wasn't based on imagination, it had been clearly established by the 2009 and 2011 lows. 

If you hold it, when do you sell?  The news and "experts" were black-bearish all along, yet banks and global equities pushed higher.  In the case of LBS, it pushed all the way back to the established long-term downtrend in black.  It's important to note that at that point banking analysts were more bullish than they'd been for more than 5 years.  Readers of this blog know we've been bearish recently and warned of this turn via our GS studies. 

Here's another way to look at it, a closer look at LBS:

If the share price approaching the long-term downtrend shown in the first chart wasn't enough, then just below the break of the first uptrend in red shown in the chart above would have been a good place to set stops.  Once that line was broken, the shares went sideways until the next trend was broken, then the price plunged down to the blue line before trading and closing back above the black uptrend line. 

That blue line marks the price at which the mid-2012 rally stopped, and it's also the price at which the plunge in late-2012 stopped.  It's not at all uncommon that stocks behave this way, so for those looking to "buy the dips" having these lines in mind is also very helpful. 

No method is perfect, and this method is nowhere near as simple as we might make it seem, but that's why we present this blog to provoke thought and educate, and any method is better than guessing, delusions, or following the sheeple flock comprising of most investors, speculators, and so-called expert analysts.


With the "Consumer Debt Supernova" portion of this post in mind, consider Friday's news that "consumer credit jumps by most in 6 months".

With this post in mind, please consider the article "Why it pays to sell in May: Be ready to sell at the first sign of market weakness".

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