The Tell: Bank of America stock chart flashes bearish signals galore

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The selloff in Bank of America Corp.’s stock Friday capped a week in which a number of bearish chart patterns were completed, implying potential for further declines to multi-month lows.

The banking giant’s shares slumped 2.5% to close at $13.83 Friday. Volume of 89.6 million shares made them the most-actively traded on the NYSE, according to FactSet.

The selloff comes as the yield on the 10-year Treasury note












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 slumped to a three-year low of 1.639%, as part of a global bond rush that pushed yields on several government benchmarks to record lows. Lower long-term interest rates can hurt banks’ earnings, as they narrow the spread between what banks earn by funding longer-term assets, such as loans, with shorter-term liabilities.

Here are some of the bearish technical developments in BofA’s stock that have occurred this past week:

On Tuesday, the stock fell below an uptrend line, supported by three support points, that began at the Feb. 11 bottom. That suggests the short-term trend has flipped to negative.

FactSet


The trendline breakdown occurred as the stock failed to get back above its 200-day moving average, which many see as a dividing line between shorter-term and longer-term trends. This indicates that the rally off the February low was just a minor bounce within a more dominant downtrend.

The stock closed Thursday below its 50-day moving average, which many use as a guide to the short-term trend. After the 50-day moving average held as support during the May pullback, the drop below it this week was a warning sign that the trendline break was for real.

FactSet


The shares closed Friday below the May 13 pullback closing low of $13.88. This is technically significant for two reasons:

The lower closing low, coupled with the fact that the June 2 close of $14.94 was below the April 22 closing of $15.11, kicked off a pattern of lower peaks and lower troughs, which the century-old Dow Theory of market analysis says defines a downtrend.

The close below the low of the valley between two peaks created a “double-top” reversal pattern. The fact that volume on the day the second top was made—64.3 million shares—was well lower than volume on the day of the first top—83.5 million shares—makes it a textbook reversal pattern, according to the Market Technicians Association.

FactSet


Many technicians, using simple math, might peg the primary downside target for BofA’s stock around $12.65, which would be the lowest level since March 1:

A measured-move target of a double-top reversal can be calculated by subtracting the height of the pattern—the April 22 high of $15.11 minus the May 13 low of $13.88—from the breakdown point, which was $13.88. So, $1.23 minus $13.88 is $12.65, which is 8.5% below current levels.

Chart watchers who use the Fibonacci ratio of 1.618, also known as the divine for golden ratio, would highlight that the 61.8% retracement of the rally from the Feb. 11 low of $11.16 to the April 22 high of $15.11—$3.95 times 0.618, subtracted from $15.11—comes in at $12.67. Read more about Fibonacci retracements.

FactSet


If the stock retraces more than 61.8% of the rally, that would indicate that it is no longer under the influence of that uptrend, and has started a new downtrend with a minimum target of a full retracement.

But as technicians may be quick to point out, a single stock can be influenced more by the technical bent of the sector the stock resides, or of the broader market, than its own textbook reversal signals.

FactSet


The fact that the SPDR Financial Select Sector exchange-traded fund












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 and the S&P 500 index












SPX, -0.92%










 made higher highs in June, and are still well higher than their May pullback lows, could reduce the likelihood that BofA’s bearish message plays out.

How BofA’s stock follows through on Friday’s breakdown, or whether it can quickly get back above May low and the broken uptrend line, could determine the fate of more than just its own stock. When bearish patterns start working for key stocks, the more likely it becomes that the bearish technical tone could spread to broader-market indexes.



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