Caution: This Stock is One for the Bears

The financial sector of the S&P 500, and more specifically the banking stocks such as Bank of America Corp (NYSE:BAC), are an incredibly important tell for the broader market at any given point in time.

Like it or not, banks are central for the proper functioning of our economy and their stocks’ behavior often reflects economic reality and/or the movement in interest rates. As such, when I see BAC stock flash a caution signal — like it is currently — I sit up and take notice.

I like to remind my clients and students on a daily basis that without perspective in the stock market, we are merely guessing.

In that vein, before booking at the charts of Bank of America stock, let us gain some insight on the broader financial sector from the charts.

Financial stocks as represented by the Financial Select Sector SPDR Fund (NYSEARCA:XLF) shot higher out of the gate following the election of now-President Donald Trump last November.

While the XLF did not peak until early March, the meat of the post-election rally had run its course by early to mid-December 2016.

An integral part of my daily analysis of financial markets includes looking at things both in absolute and relative terms. On the first chart, I have plotted the XLF ETF versus the S&P 500, and the chart clearly shows that in relative terms, the strength of the financial stocks topped out last December. Ever since, this group of stocks has underperformed the S&P 500 and as a result has now pulled back to a well-defined line of previous resistance.

The bulls will argue that this could act as an area of support and that the financials will soon once more show relative strength and begin to bounce. While I am open to all scenarios, not until price action confirms such a move and it is coupled with a move back higher in interest rates will I believe in it.

The bears, on the other hand, look at the multiyear chart of BAC stock and note that the sharp breakout rally from last November has yet to do any sort of re-testing of former support, like we so often see. In other words, former resistance has to turn into support and a re-test of former technical resistance for BAC stock could mean a move back down toward the $18.50 – $19 area (i.e. a 15% move lower from Wednesday’s closing price).

Lastly, on the daily chart we see a classic head-and-shoulders pattern has formed for BAC stock. The so called “neck line” of the pattern is marked by the black horizontal line around the $22 mark. Very simply, a break and hold below there on a daily closing basis could see a move down toward a next downside target at the red 200 day simple moving average which is currently hovering closer to $20.80.

Active investors owning BAC stock could consider reducing their positions in the stock until such time that a stronger bullish reversal takes hold once more. Traders looking to profit from a potential trigger of the head and shoulders pattern could look to short Bank of America or buy puts or put spreads with at least one to two months left to expiration.

— Serge Berger

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Source: Investor Place



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