Like many stocks throughout the market — as well as each of the major indices — the election was a turning point for Bank of America Corp (NYSE:BAC). President Donald Trump’s surprise victory sent the financials on a parabolic rally, and BAC went soaring through resistance at $19 to eventually trade at its highest level since 2008.
But things have slowed down over the last two months, and BAC stock has been trading in a range between $22 and $23.50 since early December.
Typically when a stock consolidates after such a big move to the upside, it is simply a near-term slowdown before the next rally begins. The theory behind this is not that there is an overwhelming amount of sellers, but rather that the buyers are taking a moment to catch their breath.
Still, the stock needs a catalyst before its next leg up can begin, which could come in several forms.
For BAC, it could be the result of money rotating back into the financials due to higher interest rates, strong U.S. economic data or positive moves related to the sector from the Trump administration. Only time will tell, but the end result will likely be a move to the upside.
As you can see above, adding to support near the lower end of BAC’s trading range is the 50-day moving average (the blue line), which is currently at $22.50. This combination of price support and the moving average increases the odds of the next move being higher.
There are two distinct ways to play Bank of America today. The first would be to buy in anticipation of a breakout through the upper end of the trading range.
However, I don’t often like to guess what the market will do, which is why I’d probably lean toward option number two. This strategy is to wait for BAC to break out first. You’ll end up paying a little more to build your position, but this way it will be a higher-probability trade.
Of course, there’s always a third option: Buy half your position now and the other half once the stock has broken out. This will keep your loss small should the breakout never occur. But if it does happen, it will lower your overall cost basis and you’ll still reap the rewards of the breakout.
Matthew McCall is founder and president of Penn Financial Group, an investment advisory firm. Matt also is Editor of FUTR Stocks and the ETF Bulletin. Earlier this year, Matt and Hilary Kramer teamed up on Breakout Stocks where Matt serves as the Co-Editor. Most recently, Matt and Hilary joined forces again. This time, they are helping individual investors make money trading ETFs. For more on their latest project, visit www.etfedgesummit.com.
