Stocks in the financial sector of the S&P 500 have staged impressive bullish reversals thus far this week. While this is being seen across the broader U.S. equity market as well and in part due to more central bank stimulus across the globe, from a trading perspective, a stock like Wells Fargo (NYSE:WFC) could set up for more upside.
It was just one week ago when market participants flipped into a notable short-term risk-off period, which then came to an abrupt stop and reversal early this week when global central banks (in particular China and the Fed) continued with more stimulus programs. So far this week we are seeing the exact opposite of last week.
The rally in bond yields (i.e., the drop in bond prices) this week has helped to push the financial sector of the S&P 500 to marginally fresh year-to-date highs and thus more than reversing last week’s risk-off period.
While I still think that ultimately we see lower bond yields and major bank stocks limited in upside potential, in the short term, shares of Wells Fargo could have more room to run.
Before looking at the charts allow me to say that I do think that WFC stock could continue to be plagued with the headlines around its corporate scandals of recent years.
WFC Stock Charts
On the multi-year time frame we see that although it hasn’t been a pretty couple of years for Wells Fargo stock, it has so far held on to well-defined support (blue support line), which it once again arrived at following the post-earnings selling over the past couple of weeks.
At the bottom of this chart I plotted WFC stock versus the broader financial sector, which shows the meaningful underperformance the stock has had for the past three-to-four years. The downside momentum of recent weeks, however, may be overdone and a bounce could be in the cards.
On the daily chart we see that WFC stock’s initial post-earnings selling in the first half of January then led to a small multi-day bounce. This was followed by another wave of selling into late January and finally the week-to-date bounce.
This type of two-wave selling, coupled with the relative underperformance and severe short-term oversold readings from a momentum perspective, could lead to a further bounce in the stock.
Lastly, my own proprietary B2 Reversal indicator printed a “buy” signal earlier this week.
A next upside target for the stock could be the round $50 number. Any bearish reversal from here, particularly one that breaks the stock below the $47 area, would be a clear stop loss signal.
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