Bank of America (BAC) — Shares fell 2% Wednesday on news that the financial institution and Department of Justice hit a roadblock in their negotiations over fines for the sale of mortgage-backed securities. BAC’s latest offer is $12 billion, while the DOJ is said to be looking for closer to $17 billion. Regardless of the fundamental factors driving the stock this week, selling at this level is likely to be compounded for technical reasons.
Here we see a dead cat bounce in which the stock gapped lower, rose through the gap, and then collapsed again. We have found a two-tiered target to work well in a situation like this. The first is the low established after the initial gap. This is where the bounce began that should have terminated at the top or bottom of the gap. If the stock fails to consolidate at support near $14.50, the secondary target is the 161.8% retracement of the May-June rally at $13.43.
Despite the fundamental issues, BAC remains in a long-term uptrend, so a move above $16 should be considered an invalidation of the downside targets.
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