Why Bank Of America And Wells Fargo Bulls May Get Slaughtered

Wells Fargo & Co WFC took a 10% nose dive last week after Bloomberg reported the largest U.S. bank may face further regulatory action over the speed at which it's paying out restitution payments. Bank of American Corporation BAC declined about 2.5% in sympathy over the same two trading days on Aug. 31 and Sept. 1.

Since the decline both bank stocks have settled themselves into bearish patterns and which, if recognized, could cause Wells Fargo and Bank of American to decline another 12% and 5%, respectively.

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The Wells Fargo Chart: After plummeting on the regulatory news Wells Fargo’s stock entered into a period of consolidation on the daily chart. The consolidation sent the stock into a bear flag pattern with the pole created on Aug. 31 and Sept. 1 and the flag of the formation between Sept. 2 and Wednesday.

The measured move of the pattern is equal to the percentage length of the pole. In Wells Fargo’s case the pole measures 13%, which indicates if the pattern is recognized the stock could fall toward the $38 mark.

The candlesticks Wells Fargo printed on both Tuesday and Wednesday, with their long upper wicks, are bearish and in line with the bull flag pattern. The long upper wick demonstrates that although bulls were active in buying the stock the bears are in control.

Wells Fargo is trading below the eight-day and 21-day exponential moving averages EMA) with the eight-day EMA trending below the 21-day, both of which are bearish indicators. The stock is trading above the 200-day simple moving average (SMA), however, indicating the overall long-term sentiment in the stock is bullish.

• Bulls want to see big bullish volume come in and break Wells Fargo up out of the bear flag pattern and above a resistance level at $44.96. If the stock can regain the eight-day EMA as support, the bear flag will be negated. Above the eight-day EMA Wells Fargo has resistance at $46.99 and $49.85.
• Bears want to see continued consolidation within the flag pattern and then for big bearish volume to come in and drop the Wells Fargo down through the lower ascending trendline of the formation. The stock has support at $43.02 and $41.47.

The Bank of America Chart: Bank of America has been trading mostly sideways, within a tight range between $36.50 and $43.48 since April 29. The stock entered into an uptrend within the range on July 19 and has made consistent higher highs and higher lows. The uptrend may be over, however, if the bearish head-and-shoulders pattern the stock is settling into is recognized.

The left shoulder of the pattern was made between Aug. 6 and Aug. 19, the head was formed between Aug. 20 and Sept. 3 and the right shoulder may be next to form over the coming trading days. If the pattern is formed and recognized, the measured move is 5% (found by determining the percentage difference between the neckline and the top of the head), which could cause Bank of America to fall toward the $38.40 level.

Bank of America has a gap below between $39.10 and $39.48. Gaps on charts are filled 90% of the time so it's likely the stock will trade into the range in the future. If the head-and-shoulders pattern plays out the gap will fill.

Bank of America is trading below the eight-day and 21-day EMAs but, unlike Wells Fargo, the eight-day EMA is still trending above the 21-day. This indicates bullish indecision and Bank of America will need to regain both EMAs soon to avoid causing the eight-day to cross below the 21-day. The stock is trading above the 200-day SMA, which is bullish for the longer term.

• Bulls want to see big bullish volume come in and pop Bank of America up above the EMAs. Bulls will then want to see Bank of American make a higher high above $42.84, which will negate the head-and-shoulders and confirm the uptrend is still intact. The stock has resistance above at $43.48 and $47.20.
• Bears want to see big bearish volume break Bank of American down below the neckline of the head-and-shoulders and for the selling pressure to push the stock down below support at $40. If Bak of America loses the level as support it could fill the gap. There is a further support below at $37.79.