After a brutal start to the year for banking stocks like Wells Fargo & Co (NYSE:WFC), the recent risk-on bounce in the broader market allowed them to climb out of the abyss somewhat. While this has been a great risk-reward trade, the coming weeks of central bank meetings will likely be all about talk of lower or at least not higher rates, which in turn should not bode well for banking stocks.
Active investors and traders would now be wise to consider taking profits on WFC stock with an eye on legging into initial short positions.
Before the market open on Feb. 16, I offered a trade idea to buy shares of Wells Fargo on the back of deeply oversold near-term conditions and a confirmed bullish reversal. WFC stock has since rallied more than 5%, and on Thursday came within inches of reaching my initial upside target price around the $50 mark.
I am thus now looking to book at least initial profits in what has been a nice near-term trade in WFC stock.
WFC Stock Charts
Before looking at the daily chart, let’s take a step back and for perspective focus on the longer-term weekly chart of Wells Fargo.
On this chart in red, I overlaid the S&P 500, which as you can see in the bigger sense fairly closely tracks WFC stock. Note how the breakout of the S&P 500 in 2013 also coincided with a breakout in Wells Fargo. From this angle, I could see the S&P 500 retrace back toward this breakout area around the 1600 area, which is to say that if Wells Fargo stock does the same, it could mean-revert back into the mid- to high $30s. Not only would this be a good/healthy corrective move back to a previous area of resistance, but it would also line up with a 61.8% Fibonacci retracement of the entire rally from the 2011 lows up into the 2015 highs.
On the daily chart, we see that the recent lift in WFC stock has in the meantime pushed it back toward its yellow 50-day moving average and horizontal resistance, which acted as support until early 2016. Although not entirely overbought, the momentum oscillators are beginning to look richer, and thus risk-reward on this oversold bounce is slowly but surely deteriorating.
To be clear, WFC stock could easily push into the low $50s on an overshooting move higher, which is a common occurrence on bear market rallies. However, if you are just now getting bullish on banking stocks and didn’t like them near the mid-February lows, then I would gently remind you again of the bigger picture above which makes a strong case through the technical lens of an ongoing cyclical bear market for banking stocks.
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