I get a lot of requests for bank analysis. I did a write-up recently on U.S. Bancorp (USB). That one is still playing out well, not to mention my Twitter (TWTR) analysis from last week. But I’ll be honest, that was just too easy.
So, John and Roberto, Bank of America (BAC) looks pretty bearish to me. Interestingly it seems that price preceded the news. According to Josh Arnold, a writer for Seeking Alpha, “In the company’s 10-K, filed in late February, the bank disclosed a high end estimate of legal losses above its then-current reserves of $6.1 billion. However, the 10-Q reports that the high end estimate for losses above reserves has fallen to $5 billion.”
I am calling the pattern in March a mini head and shoulders pattern. I’ll be honest, I was actually pretty bullish on BAC and $18 was a solid target for me and a few other traders. On March 21 though, I had to change my perspective drastically. BAC formed a perfect (and these are semi rare) marubozu bearish candle. That’s when the open and high are the same and the close and low are the same. These candles show selling pressure from the second the stock opened until the second it closed.
What about the present? BAC had a nice two week consolidation phase in mid to late April with a gorgeous gap down. Anyone who bought during that bull retracement to $16 was trapped (losing money). $15 became a strong support until 5/6/14 when the stock closed below that price. From 4/28 – 5/2/14 BAC formed an amazing pennant pattern, which is a continuation pattern, where volume declines. Since BAC has made lower lows since that pennant, I would say the bearish trend is confirmed.
A trader going bearish could either short the stock or buy puts. A stop would go above the most recent swing high, at $15.43 for example. Let’s say you enter with a move below the 5/6 candle at $14.70. The target on this trade is approximately $13.79. And honestly, I could even justify a stop at $15.15 if you’re looking at the hourly chart. This trade looks pretty, Folks. Enjoy! It seems some stocks are really selling off quickly, and this could be one of them.
The Bottom Line
Mitigate your risk, and as always, plan your trade and trade your plan. Wishing you many returns!
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