Financial stocks are taking it on the chin Wednesday morning. Were it not for the drubbing in oil and the energy markets, financials would be the worst performing sector in early morning trading. Bank of America Corp (NYSE:BAC) is among the biggest losers, with BAC stock shedding some 3% in value.
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The slip has brought BofA to the brink of a major breakdown.
The $22 zone has provided support for six months now. It has been a bastion of strength teeming with deep-pocketed dip buyers. Their staunch defense has kept Bank of America aloft and prevented further give-back of the great post-election gains that rained on the financial sector late last year.
If sellers are finally able to breach this floor, the technical picture of BAC stock will turn nasty.
For starters, the post-election rally left little by way of support between $17 and $22. It’s one big price void that could result in a rapid decline.
And then there’s the issue of the complex head-and-shoulders pattern that would be completed and confirmed if BAC stock were to crater below $22. The past six months of back-and-forth have developed this ominous topping formation. Rest assured, it will weigh heavy on shares if and when it’s completed.
What’s particularly vexing for shareholders is BofA’s relative weakness today. While the Vanguard Financials ETF (NYSEARCA:VFH) is down 1% right now, BAC stock is down 2.5%. For much of the past year, Bank of America has been leading its sector, so bulls are hoping today is a one-off and not the beginning of a new trend of underperformance.
How to Trade BAC Stock Here
If nothing else, Wednesday’s support test provides an actionable level to trade against. You either bet that buyers will once again defend their turf, or you wait for the levee to break and bet with bears.
Bulls: If you think Bank of America shares will remain above $21 for the next month, then sell the Jul $21 puts for 37 cents. The initial margin requirement should be around $300, making the potential return on investment north of 10%.
Bears: Traders looking for today’s weakness in BAC stock to continue could purchase the Jul $23 puts for around $1.20. If support gives way, this put play will profit handsomely.
As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.
