Bank of America Beats on Earnings and Tests Risky Level - Here Is the Trade

Bank of America was in an 'inflating parabolic bubble' formation pre-earnings, which put the stock in a sell-strength strategy. The stock tested a risky level before Wednesday's open of trading.
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Bank of America  (BAC) - Get Report extended its winning streak to 15 consecutive quarters in terms of beating earnings-per-share estimates when it reported before the open on Wednesday.

The stock traded as high as $36 in premarket trading, testing its risky level for this week at $35.80.

The details of the bank’s earnings can be found here.

The bank is the second-largest of the four money center banks that are considered “too big to fail.” It had $1.83 trillion in assets at the end of the third quarter, according to data from the Federal Deposit Insurance Corp.

It is not surprising that fixed income trading was a positive for the bank given its status as a primary dealer with a relationship with the Federal Reserve Open Market Desk at the New York Fed.

Look at the Federal Reserve Balance Sheet

The Federal Reserve Balance Sheet

The Federal Reserve Balance Sheet

On August 26, the balance sheet bottomed at above $3.76 trillion. At the end of December, it was $410 billion higher at $4.17 trillion. 

As a primary dealer, Bank of America made money on transactions with the Fed’s Open Market Trading Desk to help increase the balance sheet. The Fed did this to relieve stress in the overnight repo desk as banks appeared reluctant to lend to each other.

Back on Dec. 30, I wrote about the FDIC Quarterly Banking Profile for the third quarter of 2019. The data showed that Bank of America and Wells Fargo  (WFC) - Get Report had significant write-downs of bad loans during the quarter. 

Here's a link to my analysis.

Shares of Bank or America closed Tuesday at $35.32 in bull market territory 55.9% above its Dec. 24, 2018 low of $22.66. The stock set its multiyear intraday high of $35.72 on Dec. 27, 2019, as today’s premarket high of $36 isn't on the charts below.

Bank of America has had huge bull market runs followed by bear market corrections. The stock traded as low as $10.99 on Feb. 12, 2016, then tripled to its multiyear high of $33.05 on Aug. 12, 2018. From this high to the Dec. 24 low the stock declined by a bear market 31%. Then came the rally of 2019.

The Daily Chart for Bank of America

Daily Chart For The Bank Of America

Daily Chart For The Bank Of America

Courtesy of Refinitiv XENITH

The daily chart for Bank of America shows a price gap higher on Jan. 16, 2019, on a positive reaction to earnings. 

The stock then moved sideways along its 200-day simple moving average between Jan. 17, 2019 and Oct. 11. 

A positive reaction to earnings on Oct. 16 was followed by the formation of a “golden cross” on Oct. 29, when the 50-day simple moving average rose above the 200-day simple moving average to indicate that higher prices would follow. This tracked the stock to its Dec. 27 high of $35.72.

The close of $35.22 on Dec. 31 was an important input to my proprietary analytics. The annual risky level for 2020 is above the chart at $40.80. The semiannual risky level for the first half of 2020 is also above the chart at $36.22. The weekly risky level for this week is at $35.80.

The downside risk is to the monthly value level for January at $31.20 and the first quarter value level at $30.14.

The Weekly Chart for Bank of America

The Weekly Chart For Bank Of America

The Weekly Chart For Bank Of America

Courtesy of Refinitiv XENITH

The weekly chart for Bank of America is positive but overbought with the stock above its five-week modified moving average at $34.15. 

The stock is well above its 200-week simple moving average or “reversion to the mean” at $25.63 which was last tested during the week of Sep. 30, 2016 when the average was $15.12.

The 12x3x3 weekly slow stochastic reading is projected to slip to 88.83 this week down from 92.06 during the week of Jan. 10. This reading above 90.00 put the stock in an “inflating parabolic bubble” formation.

Trading Strategy: Reduce holdings on strength to its weekly, semiannual and annual risky levels at $35.80, $36.82 and $40.80, respectively, and buy weakness to its monthly and quarterly value levels at $3120 and $30.14.

How to use my value levels and risky levels:

The closes on Dec. 31, 2019 were inputs to my proprietary analytics and resulted in new monthly, quarterly, semiannual and annual levels. Each 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 its time horizon expires.

How to use 12x3x3 Weekly Slow Stochastic Readings:

My choice of using 12x3x3 weekly slow stochastic readings was based upon back-testing 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 that is typically followed by a decline of 10% to 20% over the next three to five months.

A reading below 10.00 is considered as being “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.