Wells Fargo & Co (WFC) has lagged its rivals since the election, stuck below the 2015 high while the majority of commercial banks post their highest highs since 2008. Even so, it’s risen nearly 25% off the deep low posted on Nov. 7 and could gain additional ground after the Jan. 13 earnings report. However, as we learned from Chipotle Mexican Grill Inc (CMG), customers may not return if management fails to admit their mistakes and take aggressive remedial action.
While market players typically focus on the bottom line during quarterly confessionals, last year’s fake account crisis still weighs heavily on investor sentiment, forcing them to reiterate steps to recover confidence and customer accounts. This signals a timing play in which everyone reading the news or listening to the conference call will be looking for magic words that put the crisis behind them. The upside could accelerate quickly and forcefully if that happens.
WFC Long-Term Chart (1993–2017)
It took off in a powerful uptrend at the end of 1990, lifting in a graceful series of new highs into the 1993 high at $7.25 (post two stock splits). An intermediate correction got bought in 1995, setting off a new trend advance that eased into a rising channel in 1998. That stable rally pattern insulated the company during the Dot.com bear market, with the uptrend barely skipping a beat. Good times continued into the second half of 2007 when it finally topped out at $37.99.
The stock ground lower in volatile selling waves into the September 2008 short squeeze when Treasury Secretary Hank Paulson outlawed sector short sales, triggering a one day rally to $44.69, which also marked channel resistance. It then crashed with world markets, dropping to an 11-year low in single digits, while the subsequent bounce stalled in 2010 in the mid-30s at the .618 Fibonacci selloff retracement level.
Price action then slipped into a rectangular range bounded by the recovery high and support at $22.50. It completed a breakout in 2013 and reached the 2008 high a few months later. A secondary breakout signaled the start of a strong uptrend that topped out at $58.76 in July 2015, with that level still marking the all-time high. The subsequent correction unfolded in a series of volatile selling waves that hit a 2-year low in October, at the height of the fake account scandal.
WFC Short-Term Chart (2014-2017)
The stock plunged during the August 2015 mini flash crash, finding support in the mid-40s and bouncing into a lower November high that set the stage for an equally deep slide into February 2016. Bank funds bottomed out at that time and posted higher lows through 2016, but Wells got caught with its hand in the cookie jar in the fourth quarter, triggering a shareholder exodus that finally ended in the low 40s.
It broke out above the trendline of lower highs after the election and surged into the .786 selloff retracement in early December. While this marks a natural turning point for stocks posting lower highs, it also serves as a platform for a final assault that completes a 100% retracement into the prior high. At this point, we have to wait until earnings to find out which of these binary results is in the cards.
On Balance Volume (OBV) entered a distribution phase in 2014, well before the 2015 peak, and continued to lose ground into the October 2016 plunge. That signaled a capitulative event that ended the downtrend and generated the first phase of a new uptrend. However, the indicator has barely budged since the trendline breakout, signaling caution that’s keeping capital on the sidelines.
The Bottom Line
Wells-Fargo’s January 17 earnings report demands an optimistic but wait-and-see approach, looking for management to instill confidence that the fake account crisis has ended and they’ve taken adequate steps to rebuild their business with sound corporate practices.
<Disclosure: the author held no positions in the stocks mentioned above at the time of publication.>