The financial sector of the S&P 500 has been a notable relative underperformer versus the S&P 500 itself. This has been a pain trade for many institutional and private investors, as expectations of higher interest rates and valuation calls led them to bullish decisions on the banks. On Wednesday, Bank of America (NYSE:BAC) rallied 2.6% as this sector received a bid. Barring an immediate reversal of Wednesday’s fortune, a trade higher now seems to be in the cards.
For the better part of the past couple of months, I have been telling my clients that while I don’t like to be thematically long financial stocks at this juncture, this sector is the biggest wild card for me for the remainder of 2018. Why? Because should longer-term interest rates receive a renewed and sustainable bid, then this sector could quickly wake up and catch up.
While I am still cautions being uber-bullish financials such as BAC stock at this point for my view is that both economic growth and inflation are peaking, from a trading perspective, and for the here and now a bullish trade does make sense.
BAC Stock Charts
Moving averages legend: red – 200 week, blue – 100 week, yellow – 50 week
On the multiyear weekly chart, we see that although BAC stock in 2018 largely trotted sideways thus far, it has done this in a well-defined and bullish looking consolidation pattern one could describe as a bull flag. Also note that the stock in July roughly bounced off it yellow 50-week simple moving average, much as it did in September 2017.
Over the past few weeks this stock has consolidated in an even tighter range and while a breakout above the aforementioned technical pattern has yet to take hold, the odds of this taking place are increasing.
Moving averages legend: red – 200 day, blue – 100 day, yellow – 50 day
Zooming into the daily chart, we see that over the past few trading sessions BAC stock has trotted around a technical confluence area of support and with Wednesday’s rally bounced right off the blue 100-day simple moving average. This also coincides with the lower end of the trading range of the past weeks.
Wednesday’s rally was also enough to push BAC stock out past diagonal resistance and all else being equal this now paints a marginally bullish picture, for a trade.
Traders could look to buy BAC stock around the $31 area with a next upside target at $32. Any major reversal of the rally from Wednesday would be a stop loss signal, although as long as support around the $30 does not break a near-term rally can still take hold.
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