Today’s big market event undoubtedly will be the FOMC interest rate decision at 2 p.m., followed by chairwoman Janet Yellen’s press conference 30 minutes later. While just about any asset class will likely see some sort of reaction to the news, banking equities like Bank of America Corp (NYSE:BAC) stock should be in focus thanks to their sensitivity to interest rate movements.
In the second half of May, BAC stock rallied on the back of hawkish Fed speaker rhetoric, but the stock has since tumbled. Those traders and investors short Bank of America could at least take profits here ahead of the Fed announcement (in the name of risk management).
In other words, while BofA’s shares could drop further, the easy part of this short play has likely run its course.
The game played by the Fed so far this year has confused many market participants, but in essence the strategy is as follows: Give a hawkish tone (i.e., threaten more interest rate hikes) but back-peddle this notion as soon as the next negative or unsupported economic data point hits.
The reality is that the Fed may well want to raise rates further in the intermediate-term to get to more normalized interest rate levels, but both economic growth and corporate growth have been slowing over the past 18 months.
All of this is also nicely reflected by the charts of BAC stock below.
Bank of America (BAC) Stock Charts
Note that for a couple of years, Bank of America found sticky support at the horizontal black line around the $15 area. This area of support broke down violently in January when broader-market pressure forced banking stocks lower too. The sharp bounce off the February lows in BAC stock then found resistance at this former support line and rejected the stock lower.
On the daily chart, we see that the above horizontal resistance line also matched up with the red 200-day simple moving average. Last week, BAC stock broke below the rising wedge pattern (black lines) that had formed as a result of the sharp melt higher off the February lows. On Tuesday, Bank of America closed around $13.26, or just about at the 50% retracement of the entire rally from February into April.
Depending on how stocks want to react to the Fed announcement today, it is possible that BAC stock bounces from this level. But given the uncertainty around this, I am not willing to make a bullish bet but rather am exiting my short position.
From here, any bounces in Bank of America stock should likely be sold into again or used to initiate short positions. But rather than making a pre-emptive strike, I’d prefer to measure the stock’s reaction in coming days.
Like what you see? Sign up for our daily Beat the Bell e-letter and get Serge’s investment advice delivered to your inbox every morning! You can also download his FREE e-Book: ‘The 3 (FREE) Tools I use to Reap Profits in The Markets.’
