Bank stocks fell last Thursday and Friday following the Federal Reserve’s dovish tone that kept interest rates unchanged. Shares of Bank of America Corp (NYSE:BAC) also traded notably lower, and BAC stock looks to have further to go as the flattening yield curve weights on basic bank net interest margins.
On Sept. 8, I shared a trade idea to sell Bank of America stock or enter out-of-the-money short call spreads if BAC were to climb toward the $16.20-$16.40 area. Last Thursday following the dovish FOMC statement, BAC stock hit this area of resistance, thus triggering my trade. The stock has since fallen a little more than 5%.
Before looking at the charts of BAC, let me point to the yield curve (the difference between two-year and 10-year Treasury yields).
The steepness of the yield curve peaked in June along with yields in 10-year T-Notes. The yield curve the began to flatten and last Thursday looks to have created a near- to medium-term lower high that now could see further flattening in coming weeks/months.
In layman’s terms: This isn’t good for bank stocks.
While I do think that interest rates will remain lower for longer, through a six- to 12-month lens I also believe that bank stocks could see good relative strength, as they still have plenty of catching-up to do on the broader stock market. To wit, on Sept. 8, I mused that “BAC stock has plenty of upside potential through the next six to 12 months, but may be capped on the upside in the near-term.”
In other words, I am a buyer of bank stocks like BAC stock on dips toward the lower end of their trading ranges.
For Bank of America stock, which through this multiyear lens remains trading in a wide range, the lower end of its trading channel is somewhere in the low to mid-$14s.
On the daily chart, we see that BAC stock after the August selloff began to climb the “wall of worry” into last Thursday’s FOMC meeting, where after a brief initial intraday rally reaction, BofA reversed lower and left behind on the daily chart a bearish reversal day.
Thursday’s bearish reaction was followed on Friday with more selling, which broke the stock below the lower end of its multiweek consolidation pattern.
Active investors who didn’t take a bearish position on BAC stock still may find an opportunity to do so at current levels, and could use a price target in the $14.50-$14.80 area.
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Successful trading and investing starts with a plan. Download Serge’s essential trading plan, The Essence of Swing Trading e-book. As of this writing, he did not hold a position in any of the aforementioned securities.
