Thursday, July 28, 2011

Trade Update: BAC

Bank of America BAC held up well yesterday in the face of the carnage in the broader market. It is no surprise since most of the sellers abandoned their shares on and just before July 18 when Bank of America reported earnings. When all of the sellers have sold the stock has to find support.

You can see what I am talking about in the three month chart in the daily time frame. The shares had a long slide into the earnings report where they bottomed out at $9.40. The bulk of the rebound toward $10.30 was most likely caused by the short sellers covering their positions. What usually happens next is a tug of war between new longs and the hungry bears eager to short again. Yesterday that battle was won by the bears, but the war wages on.

Forget about $9.68 where BAC closed last night. Look instead at $9.40 where it closed on July 18, and at $10.25, where it closed on the 21st, the places where the real battle lines are drawn. Here is why. If the shares rise above $10.25 the bears will cover again and having covered twice, will probably turn around and go long. In this case BAC will have completed a double bottom at $9.40 and $9.68 and it will be confirmed on the break of $10.25. If on the other hand the shares break below, the longs like us will get out and go short, we have our stop at $9.40.

What I am describing is a typical double bottom. It usually makes no difference to me which way a stokes eventually goes up or down, but with Bank of America under $10 here, the downside potential is limited. So, I hope for a double bottom to be confirmed, but if BAC breaks down we will cover and probably go short.

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