Charts might not lie, but as Bank of America Corp (NYSE:BAC) shares can attest, they can at least paint a complex picture. Right now, the truth as it pertains to BAC stock lies somewhere in the middle ground — the same place a profitable trade setup resides.
It was only a couple weeks ago that I last wrote about Bank of America. And not too surprisingly, much of that narrative has been discarded … at least for now.
At the time, BofA faced an increasingly bearish situation fundamentally thanks to POTUS impeachment chatter and its potential to wreack havoc on favorable legislative changes for Bank of America and other financial stocks. However, a revenue warning from Bank of America and June’s weaker-than-expected employment data also had bullish investors backpedaling on BAC stock to the point where bullish Warren Buffett looked less than head-and-shoulders above the rest.
Now, however, a more benign narrative may be taking hold in Bank of America.
Impeachment talk is, at the least, starting to simmer down, minimizing its impact on market algorithms. Market participants also appear less interested (or maybe more pessimistic) about the rate environment. While the Federal Reserve nudged interest rates higher last week, a flatter yield curve persists. The situation could work to counter the positive impact that higher rates are supposed to have on BAC stock.
Bottom line: If you want to invest in BofA, it’s not a simple decision, and one increasingly fraught with concerns and worries.
Bank of America Chart
Click to Enlarge
When I last discussed BAC stock, I wrote that “charts don’t lie per se, but technical about-faces happen often enough, and sometimes it doesn’t take long to acknowledge that type situation.”
At other times, however, conditions just become more complex. In my opinion, that’s what’s happening to Bank of America shares right now.
Bank on June 5, BAC shares breached their neckline and hinted at a larger correction out of the head-and-shoulders topping pattern. Subsequently, shares began to rally in earnest.
At the time, I discussed the possibility of using the 50-day simple moving average as a pattern breaker and technical reason to get long. It worked rather smoothly for a couple sessions, but continued price action hints that longevity is at serious risk.
The growing concern is that BAC stock is filling a bearish price gap, stochastics are overbought, and shares are reversing lower with the right shoulder still intact. I’m of the increasing mind that BofA is carving out a more complex variety of the classic topping pattern.
Let’s check out the trade idea.
How to Trade BAC Stock
Investors that ultimately wish to buy Bank of America, but agree that the technical situation looks hairy, should consider a bearishly targeted butterfly to position themselves for a few possibilities.
The Aug $23/$21/$19 put butterfly looks attractive at the moment. With BAC trading at $23.43, the spread is priced for 35 cents.
Risk is defined to the amount paid, but I’d look to take a smaller loss if Bank of America managed to definitively break the pattern’s ‘complex’ right shoulder by rallying $1.00 and through $24.43. If that scenario were to play out, the trader could also look to buy BAC stock with increased technical confidence.
On the downside, and if the bearish outlook takes hold, the butterfly has an expiration profit range from $19.35 to $22.65. Thus, if you ultimately want to buy Bank of America at cheaper prices, you can do so inside the spread’s profit range with a lower actual cost basis after factoring in potential profits from the spread. These could approach $1.65 if shares landed on $21 at expiration.
What’s more, if the situation in BAC stock were to take a significant turn for the worse below the butterfly’s $19 put strike wing, that might actually work out even nicer. While the spread’s 35 cents might be in jeopardy, you’d be in position to buy BofA shares at a discount of 18.5% to today’s prices (maybe even more) for about 1.5% in stock risk.
That’s not a bad play.
Investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives 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.
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