Shares of large-cap bank stocks such as Bank of America Corp (NYSE:BAC) rallied sharply following America’s presidential election last November. Over the past few weeks, however, BAC stock has largely been stuck in a consolidation phase. The next catalyst for shares? Fourth-quarter earnings on Friday, Jan. 13.
When it comes to trading stocks near their respective earnings reports, I have two primary rules:
- Never hold trading positions through earnings reports.
- Remain open-minded about the possible reactions to any given stock around their earnings report.
I see too many traders (both novice and seasoned) attempt to game earnings reports. Most walk away with little more than a stressful time. While select options trades can make sense through earnings reports, in my nearly 20 years as a trader, I have found much better-probability trades set up on the back of any given report (i.e., once the news is out).
When I last mused about shares of Bank of America on Dec. 5, I offered that BAC stock looked overbought in the near-term and needed at least a pause or pullback to become a better buy into year-end again.
BofA merely ended up consolidating sideways into 2016’s close, so my call to take profits for the time being was a good one.
BAC Stock Charts
On the multiyear weekly chart, we see that the breakout past horizontal resistance around the $19 mark following the November election results was a powerful one.
Although I believe BAC stock can see plenty more upside in 2017, my concern from this angle is the overbought reading we see from the MACD oscillator at the bottom of the chart. Although Bank of America doesn’t have to fall apart from here as a result of these readings, a continuation higher at the rate we saw in November into December looks very unlikely.
On the daily chart, we see that the November rally confirmed a break past diagonal resistance that took place in October. In the meantime, and as a result of the last few weeks of sideways consolidation, the intermediate term moving averages (yellow 50-day, blue 100-day and red 200-day) are getting a chance to play a little catch-up with price — and that’s a healthy thing.
Ultimately, one of these three moving averages will likely need to be tested as support for BAC stock to be a better buy again. That is to say, should BofA drop following this Friday’s report, traders would need to watch how shares react at any of these three averages.
Any strong bullish reversals off one of these three MAs could set up the next good buying opportunity.
Alternatively, should BAC stock rally and break out of the recent multiweek consolidation phase following the earnings report, quicker traders could look to hop on board and see if momentum could sustain for a next upside target toward $25-$26.
The highest-probability trade following earnings, in my opinion, would set up if BAC stock were to rally but then quickly stall and reverse lower. Such a scenario would allow traders to enter short-side trades betting that the stock will mean revert lower toward the $20 area as a first downside target.
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