Banking stocks such as Bank of America Corp (NYSE:BAC) showed renewed signs of life on Friday, Feb. 3, as President Donald Trump began work on rolling back financial regulations imposed after the 2007-09 financial crisis. BAC stock and other financials were quick to react positively to the news, and while many of them remain technically range-bound, they sure look ready to start running higher.
Active investors and traders would be wise to put these stocks on their radar this week.
Patience is a virtue, and this arguably is nowhere truer than in the stock market, where emotions tend to run high. Following their initial sharp rally following the U.S. election last November, bank stocks largely began to stall in early/mid-December and have been stuck in a choppy sideways range ever since.
Last week, neither the Federal Reserve, nor a good jobs report, nor even the aforementioned progress on easing financial regulations has cleanly broken these stocks out of their respective trading ranges.
Indeed, as we will see on the following charts, BAC stock looks ready to break out of this trading range — but we have to respect the fact that it simply hasn’t occurred.
On the chart below, I pegged the KBW Nasdaq Bank Index versus the S&P 500, as represented by the popular SPDR S&P 500 ETF Trust (NYSEARCA:SPY). Here we can see that the relative strength by banking stocks following the election results began to stall in mid-December and has shown no real relative strength nor relative weakness since.
On the multiyear weekly chart, we see that following the election, BAC stock broke past a key multiyear horizontal resistance area around the $18.50 mark.
Despite the fact that BAC has gone nowhere over the past month and a half, plenty of momentum indicators — such as the MACD indicator at the bottom of the chart — remain grossly overbought.
But here’s the thing where patience becomes such a tester: Just because a stock is “grossly overbought” in one time-frame doesn’t mean it has to suddenly correct lower. Overbought markets can work off these steep readings either through price or through time (i.e., they can either correct or just march sideways).
In the case of banking stocks, so far, they clearly fall into the latter camp.
Finally, on the daily chart, we see that even though BAC stock did not correct lower in price in recent weeks, the sideways march did allow its 50-day simple moving average (yellow) to catch up with price, which thus now also coincides with the lower end of the sideways trading range around the $22-$22.50 area.
Note that last Friday’s rally did push BofA back to the very upper end of this trading range, but again, no true breakout has yet occurred.
Less risk-averse traders may now look to leg into partial long positions in BAC stock, eyeing a first upside price target near $24 in “hopes” of a breakout.
More patient traders will want to first see a breakout on a daily close above $23.50 stick a landing. If and when that happens, it would open up the doors toward a first upside price target closer to $25. Any bearish reversal and faltering of a breakout would be a clear stop-loss signal.
Patience is a virtue.
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