NEW YORK (TheStreet) -- Shares of Wells Fargo (WFC) - Get Report have been moving steadily higher since their early April lows, but after breaking trend-line support on Monday, the stock could be on a downward path.
While gaining almost 9% during this 10-week rally, the stock remained inside a healthy bull channel. Along the way, Wells Fargo reached 52-week highs in mid-May and pushed further into all-time-high ground in June. This powerful bull trend showed signs of exhaustion last week, but the bull channel remained intact. That changed on Monday as shares broke below the lower band of their bullish pattern on heavy volume.
Wells held support late Monday near its 2014 high of $55.95, but now that the lower trend line, which linked the stock's April and May lows, is violated, more downside is likely. The stock's divergent MACD (moving average convergence/divergence) top, which has been developing since March, will also put pressure on shares.
A similar formation took place during the June-to-September time frame of last year. The result then was a bull-channel break followed by the steep October selloff. After Wells Fargo's major bull run off the Oct. 15 spike low, another MACD divergence took form between November and December. In early January, the shares took a hit after a trend-line break. A similar move appears likely, and if it falls in line with the previous drops in October and January, it could lead to a 10% correction.
With Monday's drop, Wells Fargo is now 3.8% below last week's high. A close below the current June low of $55.75 will put shares in a vulnerable position. Selling pressure will likely remain elevated as the stock moves further below the June bottom. As this plays out, a logical initial downside target is the stock's 200-day moving average near $54.
During the last two post-bull-channel breakdowns, Wells Fargo pierced this key long-term level but spent little time below it. It may prove wise to wait on Wells Fargo purchases until the 200-day moving average comes back into play.
At the time of publication, Morrow was long WFC.