Commercial bank stocks were sold in unison following JPMorgan Chase & Co. (JPM), Wells Fargo & Company (WFC) and Citigroup Inc. (C) second quarter earnings reports on Friday, despite relatively strong results and mildly bullish guidance. The bearish reaction raises a red flag for the July 18 release by Bank of America Corporation (BAC), whose stock dropped into a holding pattern in the mid-$20s in December and has failed to attract fresh buying interest so far in 2017.
Bank of America stock broke out with its rivals after the November election, surging higher in an optimistic wave driven by expectations of higher profits under the Trump administration. Weaker-than-expected GDP in the first half of 2017 has undermined that bullish thesis, while D.C. gridlock has delayed tax cuts that could underpin U.S. growth in coming years. This confusion has kept a dead weight on group performance while the S&P 500 and Nasdaq-100 have posted all-time highs. (For more, see: Bank Stocks Are Set for a Big Move Very Soon.)
BAC Long-Term Chart (1990 – 2017)
A long-term uptrend stalled at $13.75 in 1989, giving way to a downtrend that relinquished two-thirds of the stock value into the end of 1990. A bounce into 1993 stalled at resistance, delaying a breakout until 1995, when Bank of America shares took off in a powerful trend advance that ended at $44.22 during the 1998 Asian Contagion crisis. It took seven years to mount that resistance level and end a long period of underperformance.
The stock posted paltry gains following the 2005 breakout despite the growing credit, real estate and derivative bubbles, topping out at $55.08 in 2006. A slow-motion pullback accelerated to lower ground during the 2008 economic collapse, while the company barely escaped bankruptcy, bottoming out at a 26-year low at $2.53. It bounced into the second half of 2009, stalling in the upper teens, more than 30 points below the prior high. (For more, see: Behind Bank of America’s 72.2% Drop in 10 Years.)
That peak marked resistance for the next seven years, ahead of a November 2016 breakout that stalled in the mid-$20s at the start of 2017 after mounting the .386 Fibonacci bear market retracement level. The monthly stochastics oscillator entered a sell cycle one month later and is now transitioning through the indicator midpoint, predicting that headwinds will continue for another four to six months.
BAC Short-Term Chart (2015 – 2017)
Multiple attempts to rally above 2009 resistance in the upper teens into the second half of 2015 failed, giving way to a steep decline that broke three-year range support at $14.50. That marked a climactic selling event, with the stock bottoming out at $10.99 and testing broken support for seven months, ahead of a rally wave that reached multi-year resistance a few months later. The stock finally broke out in November, surging higher in a vertical impulse that stalled one month later.
A March rally attempt failed, dropping the stock into a line of horizontal support at $22 that has denied sellers since early December. Bulls could easily prevail if this level holds, marking the key price level to watch if earnings trigger a sell-the-news reaction. On the flip side, the March high at $25.80 points to a clear line of delineation between continued range-bound action and the start of a follow-through uptick that could target the lower $30s. (See also: Warren Buffet Makes $12 Billion on a Single Bank of America Investment.)
On-balance volume (OBV) surged to a multi-year high during the 2016 breakout, matching bullish price action, and topped out in March, giving way to minor profit taking that has not undermined the long-term bullish outlook. Traders should keep a close watch on this indicator if range support breaks because it needs to hold above the 2014 and 2015 highs (red line) to support a pullback buying opportunity in the upper teens.
The Bottom Line
Bank of America stock entered a narrow range-bound pattern after lifting to an eight-year high following the presidential election. A persistent sell cycle could forestall higher prices for another few months, telling market players to a keep close watch on the edges of the trading range following Tuesday’s confessional. (For related reading, check out: Will Tough Operating Environment Hurt BofA Q2 Earnings?)