Bank of America Corp. (BAC) rallied to an 8-year high this week in reaction to the Trump victory, which sets the stage for higher interest rates and the possible repeal of Dodd-Frank reform legislation. The stock is still trading 35-points below the all-time high posted at the end of 2006, with market players wondering if the gap will close and set up an outstanding opportunity for shares picked up at current price levels.
A handful of sector leaders have posted all-time highs in the post-election rally, but the vast majority is trading well below prior decade peaks, still recovering from near-death experiences and too big to fail (TBTF) government regulations. That could change if President Trump follows through on his pledge to repeal or loosen regulations, allowing banks to recreate the types of products and trading departments that got them into trouble nearly ten years ago.
BAC Long-term Chart (1993-2016)
The stock cleared 1989 resistance near 14 (post two stock splits) in 1995 and entered a strong uptrend that continued into the July 1998 high at $44.22. The subsequent downtrend unfolded in a choppy pattern that relinquished more than half the stock’s value into the December 2000 low at 18.16. It turned higher into 2001 but took another three and a half years to reach the prior decade’s peak.
A breakout into 2005 failed to generate momentum, yielding limp action on top of new support. The banking sector then caught fire in 2006, lifting the stock in a channeled uptrend that topped out in the mid-50s in the fourth quarter. That peak came much earlier than BAC’s rivals who continued to gain ground into the first half of 2007. Volatility rose sharply into 2008, yielding widening peaks and valleys into the October crash, dropping the stock to a multi-decade low.
It retraced about 30% of the selloff into October 2009 and stalled out, dropping into a broad consolidation pattern that posted a higher 2011 low near 5.00. The subsequent uptick failed to reach the 2009 high, stalling out in 2014 and giving way to a rectangular range that broke to the downside in January 2016. Aggressive buyers stepped in after the stock hit a 3-year low one month later, yielding a series of higher lows that culminated with this month’s big breakout.
A monthly Stochastics buy cycle has underpinned the upside since March, but the rally has now reached long-term resistance at the 200-month EMA just above 20 and is approaching resistance at .386 Fibonacci selloff retracement level at $22.60. It could take a long time to overcome these twin obstacles, predicting a pullback and consolidation period lasting well in 2017.
BAC Short-Term Chart (2014-2016)
Four tests at range resistance (blue line) in 2014 and 2015 failed to generate a breakout while support (red line) broke on its fourth test in January 2016, yielding a decline that found support near 11 one month later. A bounce into April stalled at the underside of the broken range, giving way to three months of testing, followed by an August buying surge that reestablished support. Buying pressure then escalated, triggering a multiyear breakout that’s now exceeded the 2010 high at 19.86.
On Balance Volume (OBV) supports the bullish cause, rising sharply from February’s deep low in a major accumulation event that predicted a long-lasting bottom. It’s just reached the highest high of this decade, confirming the recent breakout. Even so, runaway upside starting at the Nov. 9 gap between $17 and $17.60 will eventually get tested, suggesting sidelined players temper their enthusiasm while waiting for a pullback that could undercut 18.
The Bottom Line
Bank of America has broken out above 8-year resistance but is unlikely to reach the mid-20s before entering an extended consolidation and pullback period that tests new gains and shakes out weak hands. In turn, this predicts the best buying opportunity won’t come until the first quarter of 2017, at the earliest.