OK, so Wells Fargo (WFC) - Get Report made some real mistakes with its incentives for employees and with cross-selling to existing customers, and the news caused the bank's stock price to slump 3.2% on Tuesday.
When news like this breaks, it's very easy for shareholders to either panic about the stock's future prospects or feel disgust at the company and then sell their holdings, only to see the stock recover later.
So let's put aside moral judgment and possible overreaction to the negative news and look for an objective way to assess what will happen to Wells Fargo's stock price.
In July, we looked at the technical picture for Bank of America (BAC) - Get Report stock, but we also noted that our decision support engine (DSE) was saying that Wells Fargo would likely test "the $42 +/-$2 zone in the next few months."
Below is the monthly bar chart of Wells Fargo. The yellow box marks the corrective action of the past few months.
That corrective action appears to be about to break, and shares should fall into the green oval. Our updated test zone is now $41 +/-$3. Fundamental news often arrives to justify the DSE's technical forecast, and that appears to be the case with the controversy over the bank's incentives and cross-selling. The news is just noise, however, as the DSE had no whiff of this story when it optimized the exit from the yellow box to the green oval. The DSE's algorithms use only empirical data and hundreds of years of chart patterns to create "if/then" scenarios that we then probability rank.
Note that the stochastics are trying to bottom in the same place where they historically turned up. Although we can't rule out the possibility that stochastics will further probe below the 25% zone, shorter-term stochastics (not shown here) are rolling over and suggest that the stock's price will deteriorate toward the lower $40s.
Next, note that the olive/gold line, now crossing $44.70, has held the other declines from getting out of control over the past year and a half. That line is the lower two-standard-deviation band below the 200-day moving average, and it controls 95% of normality. The meaty part of the DSE's green oval, $42 +/-$2, will include the lower three- and four-standard-deviation bands, which control an average of 99.8% of normality. This creates a high confidence, ideal landing zone of $41 +/-$3.
Our simple chart here can't show these other standard-deviation bands, but we share this more-detailed information with members of our live-market Trading Room and DSE Alerts services. (Click the preceding link for a free 10-day trial of our premium analysis bundle.)
The good news is that Wells Fargo's decline from the 2015 high appears to be in its final stage, and the next couple of weeks or months should see a major buying opportunity present itself. It's still a bit early, but we wanted to give plenty of notice for those that like to plan ahead. From the low that is due in the near future, shares of Wells Fargo could rise 50%.
For updates on this analysis, as well as other trading opportunities, try our DSE Alerts service for free for a couple of weeks, or contract us at firstname.lastname@example.org
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.