How to Trade Bank of America Stock as It Approaches Resistance
Bank of America (NYSE:BAC) stock has been benefiting from a huge rebound in bank stocks. BAC stock is up 15% over the past few weeks, while JPMorgan (NYSE:JPM), Citigroup (NYSE:C), Goldman Sachs (NYSE:GS) and others are also riding higher.
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However, many of these names are running into potential resistance — including Bank of America stock.
That makes it a much harder buy than it was a few weeks ago, when it was sitting near support. Of course, it isn’t just sentiment and broad-market action that’s moving the banks. The banks are widely impacted by the gyrations in interest rates and how much money they can make as a result.
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Over the last few weeks, various spreads between long- and short-dated bonds were widening, which aids in the banks’ profitability. Therefore, BAC stock and others were on the move higher. Previously, tightening in these spreads — such as the widely watched 10-year/2-year spread — caused a brutal decline in many of these stocks.
Up big so far this month, is BAC stock worth buying now?
Trading BAC Stock
Hopefully InvestorPlace readers are sitting on big gains in BAC stock. We flagged this name a few weeks ago as it sat on range support, and the rally from that point has been impressive. Now though, shares have gone from range support to range resistance.
In late July, BAC stock was on the cusp of a major breakout. Shares were consolidating between $30 and $30.50 and looked set to make a significant move higher. This followed solid earnings and a recent increase in capital returns.
But then all the yield-curve worries came about, as bond prices surged and spreads collapsed. This was a jarring couple of days for the stock market in general and extra tough on the bank stocks.
As you can see on the chart, Bank of America stock has been consolidating between $29.50 and $30, as traders eye BofA for a potential move into range resistance.
From a trading perspective, getting the bounce from around $26.50 to $30+ is really all we need in order to justify exiting the position. For new longs or those looking for more upside though, this consolidation period is 100% necessary for a breakout to even be possible.
Without it, BAC stock price would surely be rejected from the $30.50 to $30.80 area.
Given the amount of false breakouts we’ve had in BAC stock, I eventually want to see a close above $31. That puts the 52-week high of $31.37 on the table and above that, a further rally can ensue.
If BAC stock need more time and/or is rejected from range resistance, let’s see if either the 20-day or 50-day moving average can support the stock. Below the 200-day and another test of range support is possible.
Valuing Bank of America Stock
The thing about the banks? They’re quite cheap.
Bank of America stock trades at roughly 10.5 times this year’s earnings expectations. The bank is expected to post modest earnings growth this year and next year, with 8% growth in 2019 and 6.7% growth in 2020.
Revenue is a different story though, with expectations within 10 basis points of flat for both this year and next year. Essentially, analysts predict that BAC will generate roughly the same amount of revenue in 2020 that it did in 2018. Not impressive.
Some may argue that they like JPM and Citigroup more than BAC. After all, both have better yields, better revenue growth, better earnings growth this year and in the case of Citigroup, a lower valuation. Not that JPM’s 11.6 times earnings should be considered expensive.
And while that statement may look like a negative for BAC stock, it’s not intended to. The three stocks all have low valuations and solid earnings growth projections. Further, BofA was approved for a buyback up to $30.9 billion and a 20% increase in its dividend. Shares now yield 2.4%, which is respectable in a low-rate environment, although less than the 3% and 2.9% investors can still get in JPM and C, respectively.
At the end of the day, most of this group moves in tandem. If BAC is breaking out, it’s likely C and JPM have the wind in their sails too. Keep this group on your radar, looking for a pullback or a breakout opportunity.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell is long BAC and C.
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