Wells Fargo Rebounds on Earnings as Turnaround Solidifies

Wells Fargo & Company (WFC) is the third largest among the four "too big to fail" money center banks. The bank now has a new CEO, which is a positive sign as the banking giant recovers from fines levied due to numerous scandals that rocked the company since early 2018. The bank's shares rebounded on its earnings report released before the open on Tuesday, Oct. 15. The stock is now above its monthly, quarterly, and semiannual pivots at $47.99, $47.89, and $47.99 with a positive weekly chart.

In my opinion, with the bank now focusing on rebuilding its mortgage business, Wells Fargo will be one of the first major banks to service the housing market that's in recovery mode. Wells Fargo stock closed Tuesday, Oct. 15, at $50.11, up 8.7% year to date and up 16.5% from its Dec. 26 low of $43.02. The stock is 4.4% below its 2019 high of $52.42 set on March 19.

The stock traded as high as $66.31 on Jan. 29, 2018, when the news of the scandals came to light. From this high to the Dec. 26 low of $43.02, the stock plunged by a bear market of 35%. Fundamentally, Wells Fargo is cheap, with a P/E ratio of 10.17 and a generous dividend yield of 4.15%, according to Macrotrends. The bank has now beaten earnings per share estimates in four consecutive quarters.

The daily chart for Wells Fargo

The daily chart for Wells Fargo shows the 35% bear market decline from Jan. 29, 2018, to Dec. 26, 2018. However, Dec. 26 was a "key reversal" day, when the close of $45.59 that day was above the Dec. 24 high of $45.10. This buy signal set the stage for stability in 2019.

The close of $46.08 on Dec. 31 was the first major input to my proprietary analytics. Still in play is the annual risky level at $63.29. The close of $47.32 on June 28 was also an important input to my analytics. The semiannual pivot at $47.99 has been a magnet since July 1. The close of $50.44 on Sep. 30 was another input to my analytics, and this month's pivot is $47.57, with the fourth quarter pivot at $47.89.

The weekly chart for Wells Fargo

The weekly chart for Wells Fargo is positive, with the stock above its five-week modified moving average of $48.63. The stock will likely test its 200-week simple moving average, or "reversion to the mean," at $51.97. The 12 x 3 x 3 weekly slow stochastic reading is projected to rise to 75.02 this week, up from 73.71 on Oct. 11.

Trading strategy: Buy Wells Fargo shares on weakness to the semiannual, quarterly, and monthly pivots at $47.99, $47.89, and $47.57, respectively, and reduce holdings on strength to the annual risky level at $63.29.

How to use my value levels and risky levels: Value levels and risky levels are based upon the last nine monthly, quarterly, semiannual, and annual closes. The first set of levels was based upon the closes on Dec. 31, 2018. The original annual level remains in play. The close at the end of June 2019 established new semiannual levels. The semiannual level for the second half of 2019 remains in play. The quarterly level changes after the end of each quarter, so the close on Sept. 30 established the level for the fourth quarter. The close on Sept. 30 also established the monthly level for October, as monthly levels change at the end of each month.

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.

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