Commercial banks have acted poorly so far in 2018, buffeted by the twin headwinds of rising interest rates and worldwide trade tensions. The group topped out in January and failed multiple breakout attempts through the end of the second quarter, despite pockets of strength in other cyclical sectors. Bank stocks have now drifted down to range support that is aligned with long-term moving averages and could break down in the coming weeks, entering intermediate corrections.
Top 2017 performer Bank of America Corporation (BAC) has led the downside during this period and is now trading at the lowest low since December 2017. It has also completed a potential topping pattern, with a breakdown targeting longer-term support in the low $20s. Bulls must defend those levels at all costs or risk a long-term downtrend that relinquishes gains posted since the November 2016 election. (See also: Bank of America May Fall by 10% on Slower Growth.)
BAC Long-Term Chart (1995 – 2018)
The stock broke out above six-year resistance in the mid-teens in 1995 and entered a powerful trend advance that topped out at $44.22 during the 1998 Asian Contagion. Volatility spiked sharply into the new millennium, carving a topping pattern that broke to the downside at the end of 2000. The selling wave signaled a climax event, posting a four-year low at $18.16, ahead of an upturn that reached the prior decade’s high in 2003.
A 2004 breakout failed to gain traction, generating two years of sideways action before ejecting into a modest uptrend that posted an all-time high at $55.08 in the fourth quarter of 2006. The stock turned lower into 2007 and collapsed with the banking group in the second half of 2008, hitting a 26-year low in February 2009. The subsequent bounce posted healthy gains into the new decade, topping out in the upper teens just before the infamous May 2010 flash crash.
A secondary decline posted a higher 2011 low, yielding an uptrend that reached 2010 resistance in 2014. Multiple breakout attempts into 2016 failed while the stock printed a second higher low off the historic 2009 low. It rallied to resistance once again in November 2016 and broke out, carving an Elliott five-wave advance that may have ended with a 2018 trading range on top of the .386 bear market retracement. The monthly stochastics oscillator has entered a sell cycle during the same period, reaching the oversold level in June.
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BAC Short-Term Chart (2016 – 2018)
The uptrend stalled just below the 50% bear market retracement and eased into sideways action that has carved characteristics of a descending triangle or falling wedge. Price action in the coming weeks will determine which formation is at play, with a decline into the mid-$20s confirming a triangle breakdown, while two-sided action around the 200-day exponential moving average (EMA) confirms a less bearish wedge. Monthly stochastics is buried deep in the oversold level and will support either outcome.
On-balance volume (OBV) topped out in 2010 (red line) and entered a distribution wave that continued into 2012. The subsequent accumulation wave stalled at the prior high in March 2017, generating a pullback, followed by a bounce into February that also ended at that resistance level. A May reversal marked the third failed breakout attempt, with frustrated shareholders now abandoning ship in a steady selling wave and moving on to more fruitful opportunities.
A measured move decline would drop the stock into the .786 retracement of the six-month uptrend into 2018. That level also marks deep support at the top of the trading range posted between March and October 2017, signaling a potential buying opportunity. More importantly, range support near $22 has aligned with the 50- and 200-month EMAs, raising the odds that a breakdown will signal the start of a multi-year downtrend. (For more, see: Why Bank Stocks May Fall 8% Further.)
The Bottom Line
Bank of America stock is trading in the red for 2018 and could break support in the upper $20s, opening the door to a much steeper slide. (For additional reading, check out: Focusing on Big Banks Is a Mistake: Dick Bove.)
<Disclosure: The author held no positions in the aforementioned securities at the time of publication.>