With the broader market’s over-the-top first quarter and window dressing in the rearview mirror at Bank of America (NYSE:BAC), it’s time to short BAC stock.
It was a memorable start to 2019. The S&P 500’s January through March performance was as memorable as any since the bottom of the financial crisis a decade ago.
By the numbers, the index climbed a hair over 13.50%. Still, rather than thinking of second-quarter repeats, now is a good time for bulls to lock in those capital gains. Better yet, it’s time to short BAC stock.
An inverted yield curve is already hinting strongly of a recession and an even tougher operating environment for BAC stock and other financials like Wells Fargo (NYSE:WFC) or JPMorgan Chase (NYSE:JPM). Furthermore, with Bank of America issuing bearish, canary-like warnings of late on the price chart, the more likely market repeat in the second quarter is revisiting an equally unforgettable, nerve-wracking bearish fourth quarter from last year.
BAC Stock Daily Chart
The daily chart for Bank of America stock shows that it has had more than a bit of difficulty in recent days. In fact, the recent relative weakness has resulted in BofA’s own first-quarter performance coming in roughly 100 basis points below the S&P 500 with a gain just north of 12%. But it gets worse for Bank of America stock.
In of itself, the lagging price action could be viewed as a bearish indicator for BAC stock, as well as the market. But with shares also forming a lower high (relative to fall 2018) after a failed breakout from key price congestion centered on the 200-day simple moving average and 62% Fibonacci level, it looks worse. But that’s not the end of the story, either.
BAC not only failed in their breakout attempt but they also suffered technically in a bearish manner by taking out all of the aforementioned potential price supports. In our view, the inability of buyers to even put up a fight as Bank of America traded cleanly through this area is a sure warning.
Now and with shares forming a bearish flag beneath layers of resistance, I’m inclined to discount any positive technical feedback surrounding BAC’s recent low in favor of the more pressing bottom from the fourth quarter.
Shorting BAC Stock
For investors agreeable with this analysis, fading and shorting BAC stock into overhead resistance is one favored approach. Without having any confirmation of a top though, it’s recommended to use a blended stop-loss at $28.60.
The use of this exit from a short entry of $27.60 keeps exposure in Bank of America to a manageable 3.6%. It also allows for a bit of wiggle room above the 200 SMA and letting shares move squarely back into the congestion area. I personally like that kind of margin for error.
If our forecast for a test of last December’s low in BAC proves correct, I’d look to take some initial profits at $25. However, after the position is profitable by $1, I’d be keen not to allow a loss to occur and move the stop-loss accordingly.
On the upside, if the market is really agreeable to the downside, I’d be ready to buy in more of the short position near $22.50 and bank some outsized profits. In fact, reversing the trade to go long Bank of America may very well prove a windfall purchase as a test of the December low could turn into a bonafide double-bottom of intermediate-term significance.
Disclosure: Investment accounts under Christopher Tyler’s management do not currently own positions in any securities mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.