Price Momentum Slows Bank of America in the Context of the Larger Trend

 | Feb 26, 2018 | 12:37 PM EST
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"I am a better investor because I am a businessman, and a better businessman because I am an investor."

- Warren Buffett

Bank of America Corp. (BAC) has been in an uptrend for much of the past 12 months but we like to be forward looking when we review the charts and indicators. BAC is one of Warren Buffett's (Berkshire Hathaway (BRK.A) (BRK.B) ) top holdings in his well-publicized portfolio. Buffett invested something like $5 billion in BAC back in 2011 but that is in the past. If you followed Buffett and bought BAC years ago do you hold for higher prices? Do you buy even more shares? Or is there a risk of owning BAC at this juncture? Lots of questions so let's visit the charts for any answers.

In this daily bar chart of BAC, below, we can see a sideways consolidation pattern on BAC from March to early September. From late September BAC began an uptrend. During the consolidation phase BAC traded above and below the 50-day moving average and since September it has traded above the rising 50-day line. Prices tested the 50-day line early this month but only closed below on one day. The 200-day line has been rising the past year and BAC was only tested in early September.

The daily On-Balance-Volume (OBV) line has been rising since early September and basically tells us that buyers of BAC have been more aggressive. The one bearish thing that shows on this chart is that price momentum has been slowing since early December. Prices have been making higher highs but the 12-day momentum study has been tracing out lower highs. Momentum is not a fool-proof indicator but it peaks before prices do -- it is a leading indicator. A weakening momentum picture does not mean that prices will decline but it raises the risk of a correction.

In this weekly bar chart of BAC, below, we can see that prices have rallied over the past two years. BAC is above the rising 40-week moving average line. The weekly OBV line has positive and rising for most of the past two years. The Moving Average Convergence Divergence (MACD) oscillator crossed to a new buy signal in September. The two moving averages that make up this indicator have narrowed but they have not crossed to the downside for a signal.

In this Point and Figure chart of BAC, below, we can see that prices are in a sideways trading range bounded by $32.60 on the upside and $29.22 on the downside. A breakout to $32.93 would be bullish and could open the way for gains to the $37.69 area.

Bottom line: BAC is in a clear uptrend on the weekly chart but price momentum is slowing on our daily chart. What should one do? Traders could stay long BAC but I would have a relative close sell stop just below $30.

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