Wells Fargo & Company (WFC) is the third largest among the four "too big to fail" money center banks. The company is still under the clouds of numerous scandals that have rocked the banking giant since early 2018. Wells Fargo stock rebounded to its 52-week high of $54.75 on Nov. 29 as a turnaround story. However, that was short lived, highlighted by a negative reaction to earnings reported on Jan. 14.

The stock set its 52-week high of $54.75 on Nov. 29 and then slumped to $47.18 on Jan. 24. The stock is down 11.6% year to date and is now below its 200-day simple moving average at $48.92. Looking back to its low of $43.02 set on Dec. 26, 2018, the stock is still up 10.6%. Wells Fargo stock is cheap fundamentally, with a P/E ratio of 11.09 and a generous dividend yield of 4.24%, according to Macrotrends.

At the end of the third quarter of 2019, Wells Fargo had $1.73 trillion in assets, making it the third largest among the four banks considered "too big to fail." The FDIC Quarterly Banking Profile for the third quarter of 2019 shows that Wells Fargo had significant write-downs of bad loans during that quarter.

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 a bull market gain of 23% from its 2019 low of $43.34 set on Aug. 15 to its 2019 high of $54.75 set on Nov. 29. This was helped by a "golden cross" that formed on Oct. 23, when the 50-day simple moving average rose above the 200-day simple moving average.

The price gap lower on Jan. 14 was caused by the negative reaction to earnings. The stock has been below its 200-day simple moving average at $48.92 since Jan. 22, which negated the "golden cross."

The close of $53.80 on Dec. 31 was the first major input to my proprietary analytics in 2020. The annual risky level for 2020 is above the chart and likely unachievable at $74.35. The semiannual pivot for the first half of 2020 at $51.19 is the horizontal line on the chart. The first quarter value level is below the chart at $41.59.

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, with the stock below its five-week modified moving average of $51.38. The stock fell below its 200-week simple moving average, or "reversion to the mean," at $52.18 on the negative reaction to earnings.

The 12 x 3 x 3 weekly slow stochastic reading fell to 55.92 last week, down from 71.32 on Jan. 17. This reading was 94.83 at the Nov. 29 high. This put the stock in an "inflating parabolic bubble" formation, which popped on the negative reaction to earnings.

Trading strategy: Buy Wells Fargo stock on weakness to the quarterly value level at $41.59 and reduce holdings on strength to its semiannual pivot at $51.19.

How to use my value levels and risky levels: The closing prices of stocks on Dec. 31, 2019, were inputs to my proprietary analytics and resulted in new monthly, quarterly, semiannual, and annual levels. Each calculation uses the last nine closes in these time horizons. New weekly levels are calculated after the end of each week. New monthly levels occur after the close of each month. New quarterly levels occur at the end of each quarter. Semiannual levels are updated at mid-year. 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 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 typically is 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.