Wells Fargo Upside Limited After Mixed Earnings

Wells Fargo & Company (WFC) beat first quarter earnings estimates by five cents on Friday morning, while revenues fell 1.4% year over year, matching modest expectations. The news triggered a minor pre-market uptick, lifting the troubled banking giant to a weekly high, and could attract more buyers during the regular session. However, it is unwise to expect the bounce to lift the stock out of its self-inflicted doldrums and into a new uptrend.

Wells Fargo has underperformed its rivals since 2016, when a sales scandal shocked long-term shareholders, triggering massive fines, firings and a Congressional inquiry. The Federal Reserve took unprecedented action against the bank in February 2018, advising that Wells Fargo can't grow assets until undertaking major reforms. That decree is expected to cost the bank more than $400 million in lost 2018 revenues. (See also: How Wells Fargo Became One of the Biggest Banks in America.)

WFC Long-Term Chart (1990 – 2018)

The stock posted a 52-week low at $1.69 in the fourth quarter of 1990 and took off in a powerful uptrend that stalled near $8.00 in 1993. It turned higher once again in 1995, gaining ground at a rapid pace into 1998, when buying pressure eased above $20. Price structure then entered a shallow advance, continuing straight through the 2000 to 2002 bear market before stalling in the upper $30s in 2007.

Volatility spiked sharply in 2008, with the financial crisis triggering gyrations and cross-currents throughout the banking industry. The stock popped to a new high at $44.69 in September 2008 when Treasury Secretary Hank Paulson banned banking short sales and then plunged with world markets, dropping to a 13-year low at $7.80 in March 2009. That marked a historic buying opportunity, ahead of a rapid recovery that stalled in the mid-$30s in 2010.

It finally cleared resistance in 2013, entering a trend advance that topped out in the upper $50s in July 2015. The subsequent correction unfolded in multiple waves, aggravated by September 2016 disclosures that Wells Fargo sales personnel had created millions of unauthorized accounts to meet production goals. The stock bottomed out just three weeks after the story broke, but its reverberations have continued into the second quarter of 2018.

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WFC Short-Term Chart (2016 – 2018)

A 2016 rally reached 2015 resistance in February 2017, generating a steep pullback, followed by a December breakout that posted an all-time high at $66.31 in January 2018. It then gapped down and sold off, failing the breakout before coming to rest in March in the low $50s. The monthly stochastics oscillator rolled into a major sell cycle when the decline began and is now situated in the lower half of the indicator panel, predicting another few months of relative weakness.

The Feb. 5 gap between $60 and $64 cut through the 2015 and 2017 highs, while a failed bounce two weeks later reinforced new resistance in that price zone. The subsequent decline into March ended at the .618 Fibonacci rally retracement level, marking a high-odds zone for a multi-week recovery effort. However, the downtick also broke the 200-day exponential moving average (EMA) in the upper $50s, establishing a new resistance zone that is likely to resist bull power.

On-balance volume (OBV) stalled in 2014 following a three-year accumulation phase and descended into the fourth quarter of 2016. Bottom fishers lifted the indicator into March 2017 when their efforts failed, yielding aggressive selling pressure that has established a lower highs trendline. It will take a buying surge above this line in the sand to improve Wells Fargo's highly bearish technical outlook. (For more, see: Wells Faces Potential Record Fine Over Abuses.)

The Bottom Line

Wells Fargo stock has reached a price level that could generate a multi-week recovery effort, but the stock's uptrend has ended, with aggressive selling pressure likely to return in the mid to upper $50s. As a result, long positions make little sense at this time, except for swing trades and fast flips. (For additional reading, check out: Citi, Wells' Underperformance Is Opportunity: UBS.)

<Disclosure: The author held no positions in aforementioned securities at the time of publication.>