I Like How This Stock is Beginning to Set Up

The financial sector of the S&P 500 as represented by the Financial Select Sector SPDR Fund (NYSEARCA:XLF) although higher by over 9% for the year to date has been a pain trade for many traders and investors, both professionals and retail alike.

Coming into 2017, hopes of higher interest rates were high and financials stocks at the time had just posted a steep rally on the back of the U.S. presidential elections.

That trade, however, began to fade as winter turned into spring, much to the frustration of market participants who ever since have chased any bounces and “freaked out” on any pullback.

From where I sit, this choppiness in the financial sector and large cap banking stocks in particular may soon be over and I like the way Bank of America Corp (NYSE:BAC) is beginning to set up.

BAC Stock Charts

Moving averages legend: red – 200 week, blue – 100 week, yellow – 50 week

On the multiyear weekly chart, we see in the top part that BAC stock staged a nice breakout in November and December 2016 past its multiyear horizontal resistance. However, since March of this year, a well-defined sideways consolidation phase has been traced out. From a technical perspective, this is healthy price action and it has since allowed its moving averages such as the yellow 50-week moving average to play some catch-up after having been left in the dust on the back of the sharp late-2016 rally.

At the bottom of the chart, I plotted the yield of 10-year U.S. Treasury Notes, which also remain in a consolidation phase in 2017 but have lagged the rally in bank stocks of late. This is notable as bank stocks may be giving us an early tell that interest rates too may finally find a more sustainable bid, albeit slowly so.

Last but not least, large-cap U.S. banks recently passed their latest stress test and announced more stock buyback programs. This should not be ignored, as it may also be a reason for funds to be allocating more money to this sector once again.

Moving averages legend: red – 200 day, blue – 100 day, yellow – 50 day

On the daily chart, in the top half we see that BAC stock is itching to break past a well-defined diagonal line of resistance while. In fact, if we squint, we can see that the stock last Friday has already scored a marginal breakout.

At the bottom of the chart, I posted a ratio chart where I divided BAC stock versus the XLF ETF. While there is little relative strength on the part of BAC stock versus its sector, as the ratio remains range bound, last week did see a little bounce, and it would not take too much imagination to see this accelerate higher to the top end of the range and ultimately possibly break out higher.

Given all of the above, I like BAC stock here around the $25 area for trade with a next upside target closer to $26-ish. Any bearish reversal in the stock, particularly if broad-based in the financial sector, should serve as a stop loss signal.

— Serge Berger

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Source: Investor Place