FREDAlert!
Volume 3, Issue 1
July 19, 2011
We have had numerous questions on Bank of America (BAC) and the financials. This is likely because of our recent note suggesting that trading below 9.45 would be a problem.
Certainly the stock is trading less well than anticipated – but the key thing for this stock, and for XLF also, is that this break of support turn into what technicians call a “cut-out” low, or false breakdown. This sort of formation often leads to powerful rallies. The best example I can give subscribers is the break of the 1040 support on the SPX in July of 2010 (which we forecast), that led to the summer rally last year.
What this means for us is that XLF should start to close above the previous support at 14.65 to 14.70 VERY soon. This may be happening as we speak. For BAC this means a close above 10.40 soon as well – and this looks less likely. By soon I would like to see a positive close on this week vs. last week, and then a move above the 10.40 area by next week. Should this occur, the stock could enjoy a substantial rally – into the 12’s possibly.
Should BAC not do the above, the next support is likely in the 7 to 8 area. Obviously, traders/investors should use risk management – 10% on this stock is reasonable, maybe even excessive, given the action in this name. We would also say that, should the stock not make a “cut-out” low as described above – it could languish for the remainder of 2011, even if it does not test those support areas.
We have also been asked if the market can enjoy a summer rally without the participation of the financials. The answer is yes. Recall that the market enjoyed a substantial rally from 2002 to 2004 without participation from Technology. But, obviously, we would prefer to see financials participate – with or without BAC.
We will discuss this stock on the Thursday call as well, with a few more days of trading under our belt.