Equities are getting torched today, but don’t tell that to financial stocks like Wells Fargo (NYSE:WFC). They’re holding firm in the face of the selloff so far, giving us a reason to analyze WFC stock and peers to see if there’s a trade to be had.
The bank just had an earnings report and was one of the few players in the sector to see its share price rise after the news. The relative strength was impressive, but it’s important to see if the pop was an isolated event or part of a more consistent leadership trend.
We’ll analyze all this below and provide a bullish trade idea for those that believe the muscle-flexing in financials can continue. As is customary for my single stock analysis, we’ll progress in three steps. First, we’ll break down the sector. Then, we’ll move into the weekly chart of WFC stock. Finally, we’ll end with a closer inspection of its daily chart to identify the key trends and price levels that matter most right now.
On we go.
The Financial Sector Is Stuck
When a stock’s sector is out of favor, it’s like swimming upstream. Wells Fargo can certainly climb independent of all other financial stocks, but it’s harder. While the Financial Sector ETF (NYSEARCA:XLF) delivered massive gains in the first half of the year, it has since downshifted to neutral.
On a positive note, it’s not exactly unraveling all its gains. But there’s no denying it’s lost its momentum. If you’re looking for an easy narrative for why, consider interest rates. The 10-year yield, to be exact.
It’s gotten crushed over the past six weeks. Financials are extremely sensitive to long-term interest rates because of the impact it has on their bottom line. Additionally, inflation and growth expectations are baked into rates. The rollover in the 10-year reflects investors lowering their outlook on both. And that hasn’t bode well for banks.
For now, XLF is stuck between $37 and $35. Until it breaks the topside, WFC stock has one less reason to be bullish.
WFC Stock Charts
Despite the recent neutrality, Wells Fargo’s weekly uptrend is still very much intact. The trend has paused, not reversed. And, to be fair, the rest is well deserved. After all, prices have more than doubled off the lows in less than a year. So some profit-taking after such a monstrous move is deserved.
Impressively, the 20-week moving average has been holding firm as support and confirms buyers remain in control. So as long as we remain above $42.50, consider the weekly trend healthy and support an eventual resolution higher.
The daily trend echoes the weekly’s pausing pattern. We’ve shimmied sideways long enough to flatten the 50-day moving average. Resistance near $46 held firm on the last two tests. Consider that the zone we need to blast through before bulls will reclaim the upper hand.
If you think we’re more likely to see an upside resolution to the stalemate, then here’s an options trade to consider.
The Trade: Buy the October $42.50 call while selling the August $47 call for around $3.50.
This creates a bull call diagonal spread, which behaves similar to a covered call. You’ll profit as long as WFC stock either trades sideways or higher. The best-case scenario is to have the stock rise toward $47 by expiration. If it does, you could score a profit close to $1.50, which translates into a 43% gain.
On the date of publication, Tyler Craig did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
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