Bank of America Corporation (BAC) has a winning streak of 15 consecutive quarters beating earnings per share (EPS) estimates. Even so, the stock is down 43.1% year to date and in bear market territory at 43.9% below its 52-week high of $35.72. The stock is up 11.6% from its March 23 low of $17.95.

Bank of America shares are cheap with a P/E ratio of 7.02 and a dividend yield of 3.50%, according to Macrotrends. The bank is the second largest of the four money center banks that are considered "too big to fail." Bank of America and Wells Fargo & Company (WFC) had significant write-downs of bad loans during the third quarter of 2019.

A review of the banking system in 2019

At the beginning of 2020, most Wall Street analysts were bullish on banks stocks. Not me! I study the Federal Deposit Insurance Corporation (FDIC) Quarterly Banking Profile (QBP). I never hear anyone on financial TV discuss this data, which I consider the balance sheet for the U.S. economy. The FDIC QBP for the fourth quarter of 2019 also covers data for the full year.

Net income in the banking system in 2019 declined to $233.1 billion, down 1.5% from 2018. Banks showed slower growth in net income. Banks were worried about the economy as they increased loan loss provisions. Banks also reported lower non-interest income. The average return on assets fell to 1.29% from 1.35% in 2018.

The daily chart for Bank of America

Daily chart showing the share price performance of Bank of America Corporation (BAC)
Refinitiv XENITH

The daily chart for Bank of America shows a price gap higher on Jan. 16, 2019, on a positive reaction to earnings. The stock then moved sideways along its 200-day simple moving average between Jan. 17 and Oct. 11, 2019. A positive reaction to earnings on Oct. 16 was followed by the formation of a "golden cross" on Oct. 29, when the 50-day simple moving average rose above the 200-day simple moving average to indicate that higher prices would follow. This tracked the stock to its Dec. 27 high of $35.72.

The stock gapped below its 50-day simple moving average on Feb. 24. The gap below the 200-day simple moving average on Feb. 27 ended the "golden cross" formation. The stock did not bottom until testing $17.95 on March 23. The upside potential on a consolidation of the bear market is to its second quarter risky level at $24.62 and its risky level for April at $27.16.

The weekly chart for Bank of America

Weekly chart showing the share price performance of Bank of America Corporation (BAC)
Refinitiv XENITH

The weekly chart for Bank of America is negative but oversold, with the stock below its five-week modified moving average at $25.39. The stock has been below its 200-week simple moving average, or "reversion to the mean," at $26.41 since the week of March 6. 

The 12 x 3 x 3 weekly slow stochastic reading is projected to slip to 19.81 last week, falling below the oversold threshold of 20.00. At its December 2019 high, this reading was above 90.00, which had the stock in an "inflating parabolic bubble" formation. This led to the bear market decline. 

Trading strategy: Sell Bank of America shares on strength to the quarterly and monthly risky levels at $24.62 and $27.16, respectively.

How to use my value levels and risky levels: The stock's closing price on Dec. 31, 2019, was an input to my proprietary analytics. Semiannual and annual levels remain on the charts. Each calculation uses the last nine closes in these time horizons.

Second quarter 2020 and monthly levels for April were established based upon the closing price on March 31. New weekly levels are calculated after the end of each week, and new quarterly levels occur at the end of each quarter. Semiannual levels are updated at mid-year, while annual levels are in play all year long.

My theory is that nine years of volatility between closes are enough to assume that all possible bullish or bearish events for the stock are factored in. To capture share price volatility, investors should buy shares on weakness to a value level and reduce holdings on strength to a risky level. A pivot is a value level or risky level that was violated within its time horizon. Pivots act as magnets that have a high probability of being tested again before their time horizon expires.

How to use 12 x 3 x 3 weekly slow stochastic readings: My choice of using 12 x 3 x 3 weekly slow stochastic readings was based upon backtesting many methods of reading share-price momentum with the objective of finding the combination that resulted in the fewest false signals. I did this following the stock market crash of 1987, so I have been happy with the results for more than 30 years.

The stochastic reading covers the last 12 weeks of highs, lows, and closes for the stock. There is a raw calculation of the differences between the highest high and lowest low versus the closes. These levels are modified to a fast reading and a slow reading, and I found that the slow reading worked the best.

The stochastic reading scales between 00.00 and 100.00, with readings above 80.00 considered overbought and readings below 20.00 considered oversold. A reading above 90.00 is considered an "inflating parabolic bubble" formation, which is typically followed by a decline of 10% to 20% over the next three to five months. A reading below 10.00 is considered "too cheap to ignore," which is typically followed by gains of 10% to 20% over the next three to five months.

Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.