Wells Fargo & Company (WFC) missed earnings per share estimates in each of the past two quarters. The stock is down 51.2% year to date and in bear market territory at 52.1% below its 52-week high of $54.75 set on Nov. 29. The stock is up just 4.5% from its March 23 low of $25.11.

Wells Fargo stock is cheap, with a P/E ratio of 6.26 and a dividend yield of 7.49%, according to Macrotrends. The bank is the third largest of the four money center banks that are considered "too big to fail."

Status of banking system based on fourth quarter 2019 FDIC data

The good news from the fourth quarter 2019 Federal Deposit Insurance Corporation (FDIC) Quarterly Banking Profile (QBP) is the status of the Deposit Insurance Fund (DIF). The fund has $110.3 billion to protect $7.8 trillion of insured deposits. This is well within the regulatory guideline for this fund.

When you study the real estate lending categories from the fourth quarter QBP, you see that total real estate loans rose 0.8% sequentially in the quarter. However, this is not back to the level reached at the end of 2007. Real estate lending is thus a drag on the U.S. economy.

Most notable is that home equity loans have been declining in every quarter since the end of 2007 despite the re-inflated bubble for home prices. This category of lending is down 43.7% since the end of 2007. Construction and development loans to new communities and homebuilders, while rising in recent quarters, are down 42.5% since the end of 2007. The loan category to worry about now is nonfarm nonresidential Loans, which are up 56.3% since the end of 2007. This is where problem loans could hurt the banking system.

The daily chart for Wells Fargo

Daily chart showing the share price performance of Wells Fargo & Company (WFC)
Refinitiv XENITH

The daily chart for Wells Fargo shows the formation of a "golden cross" on Oct. 24, 2019, when the 50-day simple moving average moved above the 200-day simple moving average, indicating that higher prices would follow. This buy signal tracked the stock to its multi-year high of $54.75 set on Nov. 29. The buy signal was voided on Jan. 22, 2020, when the 200-day simple moving average failed to hold.

The stock dropped below its semiannual pivot at $51.19 on Jan. 14. As the stock started to crash, a "death cross" formed on March 5. The 50-day simple moving average fell below the 200-day simple moving average, which defined the "death cross" and indicated that lower prices would follow. This was the catalyst that dropped the stock to $25.11 on March 23.

The weekly chart for Wells Fargo

Weekly chart showing the share price performance of Wells Fargo & Company (WFC)
Refinitiv XENITH

The weekly chart for Wells Fargo is negative but oversold, with the stock below its five-week modified moving average at $35.27. The stock has been below its 200-week simple moving average, or "reversion to the mean," at $51.63 since the week of Jan 17. 

The 12 x 3 x 3 weekly slow stochastic reading slipped to 10.10 last week, well below the oversold threshold of 20.00. It may soon be "too cheap to Ignore" with a reading below 10.00. At its January high this reading was above 90.00, which had the stock in an "inflating parabolic bubble" formation. This led to the bear market decline. 

Trading strategy: Sell Wells Fargo shares on strength to the quarterly and monthly risky levels at $39.00 and $40.94, respectively.

How to use my value levels and risky levels: The stock's closing price on Dec. 31, 2019, was an input to my proprietary analytics. Semiannual and annual levels remain on the charts. Each calculation uses the last nine closes in these time horizons.

Second quarter 2020 and monthly levels for April were established based upon the closing price on March 31. New weekly levels are calculated after the end of each week, and new quarterly levels occur at the end of each quarter. Semiannual levels are updated at mid-year, while annual levels are in play all year long.

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.

How to use 12 x 3 x 3 weekly slow stochastic readings: My choice of using 12 x 3 x 3 weekly slow stochastic readings was based upon backtesting many methods of reading share-price momentum with the objective of finding the combination that resulted in the fewest false signals. I did this following the stock market crash of 1987, so I have been happy with the results for more than 30 years.

The stochastic reading covers the last 12 weeks of highs, lows, and closes for the stock. There is a raw calculation of the differences between the highest high and lowest low versus the closes. These levels are modified to a fast reading and a slow reading, and I found that the slow reading worked the best.

The stochastic reading scales between 00.00 and 100.00, with readings above 80.00 considered overbought and readings below 20.00 considered oversold. A reading above 90.00 is considered an "inflating parabolic bubble" formation, which is typically followed by a decline of 10% to 20% over the next three to five months. A reading below 10.00 is considered "too cheap to ignore," which is typically followed by gains of 10% to 20% over the next three to five months.

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