Bank of America: Lackluster, Headwinds Forming A Bearish Setup (Technical Analysis)

Summary:

• Lyn Alden and Avi Gilburt provide fundamental insights, highlighting Bank of America Corporation’s exposure to long-duration underwater mortgages and its medium valuation.
• Our composite methodology is emphasized for its ability to provide market context, with a bearish setup for Bank of America suggested by recent price structures and fundamentals.
• Our analysis suggests BAC may see a decline, with a potential target of $31, provided the price stays below $41 in the near term.

By Levi at Elliott Wave Trader; Produced with Avi Gilburt.

Lyn Alden provides us with some keen insights regarding many of the tickers that we follow for members and the readership. Then, our lead analysts Zac Mannes and Garrett Patten carefully chart the structure of price as it speaks its message. The synergy between these two principal prongs of our methodology allows us to share higher probability setups, both bullish and bearish in nature. Let’s look at how both sides of this mesh in what appears to be a bearish setup for Bank of America Corporation (NYSE:BAC).

The Fundamental Snapshot For Bank of America

Avi Gilburt has shared extensive research results from Safer Banking Research regarding most of the large banks here Stateside as well as many regional banks. This is truly an assiduous and painstaking process that ends up revealing some fascinating findings. You can find these articles on his author profile page.

Lyn Alden also scours through company reports to give us the current stance and potential for investible options across the marketplace. She recently commented on BAC. Her conclusions lend weight to the structure of price that sentiment is painting on the chart as well.

“Bank of America (BAC) has more exposure to long-duration underwater mortgages than the other top banks in the United States. It’s not a true solvency issue, but rather just a profitability headwind, and I expect that the majority of the pain from that is behind them.

Current conditions among large banks suggest that there is no 2008-like crisis likely in an investable time horizon. Large banks are well-capitalized and generally quite risk-averse in terms of credit standards, unlike the pre-2008 period.

And so my main concern with BAC is about its chance of being lackluster. At a price/earnings ratio of a little under 13x it’s trading at a medium valuation, and its price/book ratio is middling as well. It can easily fluctuate 20% up or down on general market sentiment and pays only about a 2.5% dividend yield along the way.

I’d be more interested on any potential sharp dips.” – Lyn Alden.

With this view in mind, let’s look at the charts and listen in as they also will provide guidance. One very key point is to consider the context of the bigger picture.

Remember, It’s All About The Context

Please allow a brief aside to better set the table for our current conclusion for BAC. We must first look at the context. Do you know of another technical analysis methodology that can provide context as to where we find ourselves at any point? We’re not aware of one apart from Elliott Wave theory when correctly applied. Why is this?

Recall that the market is fractal in nature. It exhibits self-similarity at all degrees of the structure of price. Furthermore, markets and stocks typically advance in 5 waves and correct in 3 waves. Since these fractal patterns repeat themselves in all time frames, they provide us with predictable forms that can be tracked and traded.

Not all analysts who label their charts as “Elliott Wave” are truly practicing this discipline. Please do not be put off by “wave-slappers,” those who simply paste labels on a chart and then pass it as “Elliott Wave.”

Our analysis must pass rigorous standards. These standards are really probabilities. And they keep us on the right side of the market much more often than not.

What’s more powerful, individual opinions or crowd behavior? We would invite you to read a recent article by Avi Gilburt published here for the readership. It discusses preconceived notions and our strongly held opinions vs. the price action of the market that unfolds in front of our eyes. This is a brief excerpt from that piece:

“At the end of the day, I personally believe it to be a waste of time to attempt to prognosticate market movements based upon expected events. History has proven this many times over, assuming we are willing to listen to and learn from history’s lessons. Yet, most of you reading this article will simply shrug and move on to the next expected news catalyst on your list or the next article which will explain the ‘reason’ why the market is going to move in one direction or another.”

The Context For Bank of America Suggests A Bearish Setup

So, here’s what to watch in the BAC chart.

Note in this 4-hour interval that Zac is considering the last top struck over the summer as a Primary “B” wave. This is a large degree top that would make us lean bearish for some time going forward. How the subwaves unfold will give us a more exact target as well as communicate to us when we might anticipate the move lower in Primary “C” to come to fruition.

Near term, a bit higher is certainly possible. For as long as the high struck in July is not exceeded, then we would consider it as a corrective move in either wave “2” shown in light blue, or the purple “B” wave as you can see.

Ideally, in this bearish setup, the price now stays below $41 and continues to subdivide lower. The $31 region is well within reach over the coming weeks to months in this initial portion of a larger corrective pattern.

Conclusion

There are many ways to analyze and track stocks and the market they form. Some are more consistent than others. For us, this method has proved the most reliable and keeps us on the right side of the trade much more often than not. Nothing is perfect in this world, but for those looking to open their eyes to a new universe of trading and investing, why not consider studying this further? It may just be one of the most illuminating projects you undertake.

(Housekeeping Matters).

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Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, but may initiate a beneficial Short position through short-selling of the stock, or purchase of put options or similar derivatives in BAC over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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