Watching the Dropped Shoe on Wells Fargo

 | Feb 05, 2018 | 9:03 AM EST
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We last took a look at Wells Fargo & Co. (WFC)  in the middle of January, and we outlined a strategy to buy it. "With a breakout at $59 and a longer-term price target of $94 the question becomes where and how do we want to buy WFC? In case WFC does not correct until a higher level I would buy some (1/3) here. If prices dip toward $61 I would consider buying some more -- like 1/3. I would buy the last 1/3 when the average position was profitable. A close below $58 would be my risk parameter."

With prices diving down to below $60 this morning a new or revised strategy is needed.

In this daily bar chart of WFC, below, we have prices updated through Friday. This morning before the NYSE opening WFC is under the rising 50-day moving average line. Prices have quickly given back approximately half of their November-January rally. If a 50% retracement does not attract buying interest I typically look for prices to retrace around 2/3 of the advance. If the rising 50-day average line becomes resistance (this would happen if prices failed there on a bounce) then moving average followers would look to the rising 200-day average line as a possible magnet.

The volume of trading is likely to be heavy today and this could weaken the On-Balance-Volume (OBV) further. A declining OBV line tells us that sellers of WFC are more aggressive. The trend-following Moving Average Convergence Divergence (MACD) oscillator crossed to the downside last week for a take profits sell signal.

In this weekly bar chart of WFC, below, we do not have much in the way of negative signals. The weekly bars of the past two weeks show a two-week reversal. A high close two weeks ago followed by a low close last week. This reversal quickly turns the trend from up to down. Prices are still above the lagging 40-week moving average line. The OBV line on this time frame has not turned down and the MACD oscillator is still bullish.

In this Point and Figure chart of WFC, below, we do not have a downside price projection but the volume at price data (left scale) shows that prices could have risk down into the mid-$50s or so.

Bottom line: If you are long WFC from before or bought a 1/3 position on my suggestion I would continue risking a close below $58. This position will need to be watched closely in case another shoe drops.

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