Tax cut optimism and an expected December interest rate hike have lifted commercial banks to multi-year highs, in expectations of record profits through greater business activity and wider yield spreads. Bank of America Corporation (BAC) stock has attracted strong buying interest in this bullish wave, breaking out to a nine-year high in the upper $20s. More importantly, it has now opened the technical door to more rapid upside that could reach the upper $30s in the second half of 2018.
Commercial banks have already hit short-term overbought technical readings following a three-day vertical buying impulse, so risk-conscious market players may wish to stand aside right here and wait for an orderly pullback that tests new support. A decline that fills Bank of America's Nov. 28 gap between $27.50 and $28 might do the trick, offering a low-risk entry ahead of a first upside target at $31.50. (See also: Bank of America Stock Breaks Out After Powell Testimony.)
BAC Long-Term Chart (1989 – 2017)
The stock topped out at a split-adjusted $13.75 in 1989 and sold off to $4.22 in 1990. It took nearly four years for the subsequent uptick to clear resistance at the prior peak, yielding a 1995 breakout that gathered substantial momentum into the July 1998 high at $44.22, when the Asian Contagion triggered a slide into the mid-$20s. The subsequent bounce failed to stir buying interest, yielding a series of lower lows into the first quarter of 2000, when it bottomed out in the upper teens.
A slow-motion recovery wave reached the 1998 high in 2003, ahead of a 2004 cup and handle breakout that generated mixed but positive price action into the November 2006 all-time high at $55.08. The tables then turned in a modest reversal that gathered hurricane force during the 2008 economic collapse, dropping to a 25-year low at $2.53, ahead of a quick upturn that stalled near $20 in the second quarter of 2010.
The stock spent more than six years testing that resistance level, finally breaking out after the November 2016 election and entering a powerful trend advance that stalled at $25.77 in March 2017. It completed a basing pattern at the 50-day exponential moving average (EMA) in September and turned sharply higher, posting new highs in October and again this week. This price action has finally cleared the .618 Fibonacci retracement of the dramatic sell-off wave between September 2008 and March 2009.
You may recall the massive September squeeze when U.S. Treasury Secretary Hank Paulson banned short sales in an effort to stabilize the troubled banking sector, but the politically motived move backfired, printing lower highs ahead of the final collapse. The stock has been retracing that selling wave for many years, finally mounting the critical .618 level in October 2017. In turn, this price action opens the door to the .786 retracement level at $31.50 and 100% retracement at $39.50. (For more, see: Short Goldman Sachs, Buy Bank of America: Bove.)
BAC Short-Term Chart (2016 – 2017)
A furious decline broke three-year support near $15 at the start of 2016, reaching a three-year low at $10.99 in February. It remounted the broken trading range in August, setting off a preliminary buying signal that came to fruition during November's big breakout. Meanwhile, the price pattern since the deep low has drawn the outline of an Elliott five-wave advance, with the 2017 trading range marking the fourth wave consolidation, ahead of a fifth wave breakout that targets the .786 selloff retracement level in the low $30s. It also suggests that the stock will undergo a deeper correction following this final impulse. (To learn more, see: Elliott Wave Theory.)
The Bottom Line
Bank of America stock has rallied to a nine-year high in the upper $20s and could lift into the lower $30s in the first quarter of 2018, ahead of larger-scale upside that could eventually reach the September 2008 high near $40. (For additional reading, check out: These Sectors Benefit From Rising Interest Rates.)
<Disclosure: The author held no positions in the aforementioned securities at the time of publication.>