Traders tend to keep records of their trades and periodically look back at what worked, what didn't, and why. This article will revisit
in light of its
earlier this week, and the development of Wells Fargo's charts since then.
If you remember, we were short WFC from the high $29 area, and we ended up riding it down to the $26 swing point.That ended up being a
So what now? Tuesday we saw WFC go against the tape, trading higher while the
Financial Select Sector SPDR
exchange-traded fund and most other stocks in the sector traded lower. Is it time to buy or is there more room on the downside? Let's take a look.
The market hasn't revealed any additional information on the long-term time frame since we last checked, but the intermediate-term time frame has so let's start there.
In this chart, you can still see the two floors created since May. The bottom of the higher price level floor was tested Tuesday as prices hit the $25 price point and bounced back higher.
Although this does keep WFC trading on the top floor, the problem is that volume is expanding on a weekly basis. By the end of this week, volume is likely to expand sufficiently and we will probably be forced to question the successfulness of the bounce off of $25.
Here's what I mean: Imagine someone with a sledgehammer banging on the $25 price support area. It won't break on the first hit or two, but if it's hit enough and with enough force, eventually the floor will give and you'll find yourself standing on the next floor down. With volume expanding on a weekly basis, that's what appears to be happening here.
Now switch to the short-term time frame and you can see further why I'm thinking this.
The last time we looked at this chart, I hypothesized that Wells Fargo could trade to the $24-$25 price range as that would end up being the price projection from the AB=CD pattern. It did just that over the past three days and Tuesday, on the announcement of the $25 secondary pricing, the buyers swooped in thinking they might get the same kind of short-term price performance they enjoyed the last time around.
While the jury is still out on that, notice that we now have a
trend on this time frame. That is true because volume did expand as we traded under the previous swing point (actually it did so on both the November and the October swing points although only one is highlighted in the chart).
With the large volume spike Tuesday, a nimble trader can look to trade this higher for a follow-through on the momentum, but it appears that it is likely to be a short-term bounce at which selling should kick in again. If that selling does materialize, and if volume does expand on the next trip down, then the lower floor will become a reality for WFC prices.
XLF, the sector ETF, tends to support this idea as well. Look at how that island reversal did hold up and has resulted in the continued retrace lower. Technical analysts Robert Edwards and John Magee tell us that an island reversal usually ends up taking back the entire minor move that preceded it. In this case, if that happens, the XLF is headed back to the $10 range longer term.
If you measure the minor move from the last breakout point then we should see the $13 target met at a minimum.
When you put it all together, the sector pressure is likely to keep any bounce in WFC both contained and short-lived. The original thought of a $24 or even a $20 price target is starting to look more and more likely. Patience is indeed a virtue in trading.
So, until next time, keep trading the charts!
L.A. Little is an author, professional trader and money manager who writes daily on
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