Even though Barclays PLC (BCS) surprised the markets with much-better-than-expected earnings, the charts of the British banks continue to look weak. BCS is up 3.7% in Tuesday’s London trade, while Lloyds Banking Group Plc (LYG) is up 2.3%, and the Royal Bank of Scotland (RBS) has gained 1.3%. The charts of LYG and RBS appear to show long-term continuation patterns. These sideways patterns are just interruptions in the dominant trend and indicate these banks are likely to stay weaker than the overall market. Let’s take a look:

chart
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Chart Analysis:  The weekly chart of LYG shows that it closed below weekly support last week and is now trying to bounce.

  • In December 2009, LYG gapped lower. The gap between $4.97 and $3.84 has almost been filled during the 2010 rebound

  • There is resistance now at $4.40 - $4.60 and a decisive move above this level would improve the short-term outlook

  • The major 50% retracement resistance stands at $5.20

  • There is key support now at $3.70 - $3.85, which, if broken, will complete the flag formation (lines a and b)

  • The flag formation has initial downside targets at $2.30

  • The weekly on-balance volume (OBV) is locked in a downward range and is neutral

RBS violated its eleven-month uptrend in November 2010, which likely completed a major triangle formation as indicated by lines c and d.

  • The former uptrend (line d) and first resistance are now in the $15 area with major resistance in the $16.50 - $18 area

  • The key swing support on the daily chart is at $13.20, and if broken, RBS should decline to the lows at $11.60 - $11.70

  • A break below the $11.60 - $11.70 level would suggest a decline to the $9 area

  • The daily OBV is above its weighted moving average (WMA) but is not giving any clear signals

What It Means: The British banks continue to underperform the broader market as represented by the S&P 500. Since the close on September 1, the S&P 500 is up 23.4% while LYG is down 3% and RBS is unchanged. If the overall market does correct lower, these banks are likely to drop further, as the continuation patterns are likely interruptions in the overall downtrend. It would take significant improvement to indicate that LYG and RBS have bottomed out.

How to Profit: On a break of the key support levels outlined above, then a bearish strategy could be employed. Clearly, if you are long either of these stocks, ensure that stops are in place, and watch for a drop below the November 2010 lows, as that would be quite negative. No new recommendations at this time.

Tom Aspray, professional trader and analyst, serves as senior editor for MoneyShow.com. The views expressed here are his own.