Shares of Bank of America Corp (NYSE:BAC) often act well in sync with the broader U.S. stock market, as do other large banking stocks. Through the lens of technical analysis, however, BAC stock also from time to time gives better/clearer signals than the indices do, allowing active investors not only to get a better read on the broader market’s near-term direction but also to better define their risk.
BAC stock has once again reached such a juncture.
Shares of Bank of America tend to ebb and flow with the steepness of the yield curve. When the yield curve steepens (in other words, when longer-dated interest rates rise relative to shorter-dated rates), BAC stock tends to rise. When the yield curve flattens, as it has over recent weeks, then BAC stock tends to trade sideways or lower.
Thus far, 2015 has seen a diverse series of focal points from a market participant’s perspective, but the “fear” of an interest rate hike by the Federal Reserve largely remained front and center. With the September FOMC meeting just around the corner next week, chances are we will soon get more clarity around this, and bank stocks will likely react noticeably.
With the increased volatility in interest rates this year, the yield curve has several meaningful shifts up and down as well — all of which largely kept shares of BAC stock range-bound.
BAC Stock Charts
To get some context around this, let’s first take a look at the long-term weekly chart of BAC stock, where we see that after a sharp rise off a higher low in late 2011, BofA found horizontal technical resistance in the spring of 2014 that stretches back to the 2009 reaction highs.
The stock has been range-bound ever since. Banking stocks such as BAC, however, have largely lagged the broader market since the financial crisis, and ultimately this gap will narrow, which remains my base case toward the second quarter of 2016. In other words, 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.
If we zoom in closer on BAC stock’s daily chart, we see that from the July highs to the recent lows in late August, Bank of America lost about 20%, and by so doing revisited the lower end of its 18-month trading range. BofA, however, now also faces well-defined technical resistance above, made up of its 100- and 200-day moving averages (blue and red lines respectively).
Considering the volatility in the broader stock market, BAC stock looks to be a good candidate to play on the short side once it reaches the upper end of its two-week trading range again, which lies around the $16.20-$16.40 area. This area also coincides with a 50% retracement of the July-August sell-off.
Active investors could look to sell short BAC around those levels, or look to sell out of the money call spreads. A price target at $14.90 could be used, while any push above $17 should be used as a trigger to stop out of the trade.
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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.
