Shares of Bank of America Corp (BAC) rallied strongly off the mid-October lows along with the broader market. Although BAC stock is potentially overbought in the immediate term, the medium- and longer-term picture looks solid. Thus, strategic traders and investors should keep BAC on their radar, as much more upside is likely ahead in coming years.
In fully transparent fashion, and to show the thought process, allow me to follow up on a trade idea that I discussed on the morning of Oct. 16. Specifically in regards to BAC stock, I said the following:
“While still positively positioned through a multimonth lens,BAC is best avoided from the long side until the broader market shows signs of stabilization. Once this takes place, which for BAC could occur anywhere from $14-$15.50, the stock could quickly move back toward the $17.50 area.”
By the end of Oct. 16, not only did BAC stock confirm a near-term bottom, but the broader market (as measured by all of the major U.S. equity indices) also had formed clear bullish reversals. The stock then rallied strongly, and on Tuesday, BAC came within cents of my price target at $17.50.
Meanwhile, the broader U.S. equity indices look increasingly overbought, and given the positive correlation within stocks as an asset class, this doesn’t look like the time to chase BAC higher. However, Bank of America now looks even better positioned through a multimonth lens, meaning that further pullbacks probably should be bought.
BAC Stock Charts
Looking at the multiyear weekly chart of BAC stock, note that the entire movement from spring 2010 to present day can be looked at as having taken the shape of a gigantic so called “cup and handle” formation. The selloff from the 2010 highs down to the late 2011 lows and then back up into the March 2014 highs formed a big cup, and the pullback in the spring into the summer formed a handle.
From this big-picture point of view, and when we consider that the Relative Strength Index (RSI) is curling back up, BAC stock should be able to push to new highs in coming months.
On the daily chart, note that the October lows formed a third higher low since the lows in May. All of this has pushed the stock marginally past into (actually marginally above) the diagonal resistance line from March and is coiling it up to pop higher.
To be clear, BAC stock shouldn’t necessarily be chased higher in the immediate term, but do consider it in a multimonth time frame. Any dips into the mid-teens from this perspective should be bought for an eventual move into the $18.50-$19 area.
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Download Serge’s trading plan in the Essence of Swing Trading e-book here. As of this writing, he did not hold a position in any of the aforementioned securities.
