10/23/09 - 10:35 AM EDT
With all the fuss being made over Rochdale Securities analyst Dick Bove's downgrade of Wells Fargo(WFC Quote) Wednesday afternoon and the subsequent selloff in the bank's shares, a look at the stock's technical situation seems in order.
Wells Fargo has more than tripled in price since the March lows. Those gains, along with the recovery of a few other heavyweight bank stocks, have been a driving force in the broader market's tremendous push higher from the March lows.
In case you missed what happened Wednesday, Wells Fargo reported earnings and initially traded higher on the news, moving to a little more than $31 per share. By the afternoon though, they were starting to slip. With less than an hour to go in the trading session, Bove dropped a bombshell.
Having initially commented that Wells' earnings looked OK, he made an about-face and cut his rating on the bank's shares to sell from neutral. They tanked and dragged the whole market down with them. Was the price drop justified? Will the stock continue lower or simply work even higher? What does the technical picture tell us?
When attempting to understand a stock's potential, it is always best to construct long-, intermediate- and short-term views. Depending on the time frame you are attempting to trade, the time interval examined will be different. In this analysis, I'll approach Wells Fargo from the point of view of a swing trader, someone who intends to hold it for weeks or months, not days.
Long-Term View
On a long-term chart (three-year, monthly candles), we can see that Wells Fargo saw volume accelerate as it initially rose from the March lows. Since June, however, it has worked higher on less and less volume. Wells Monthy
Source: Prophet Financial Systems
The declining volume is not an indictment, but it is something to monitor. When stock prices rise without accompanying volume, the stocks become less and less attractive from a technical standpoint.
Intermediate-Term View
On an intermediate-term chart (one-year, weekly bars), an interesting and quite bullish formation appears. It is the cup-and-handle formation. Although one must wait for the stock to break out of that pattern to new highs, it is commonly viewed as a bullish continuation pattern. Wells Weekly
Source: Prophet Financial Systems
A breakout from a cup-and-handle results in a measured move that equals the height of the cup to the tip of the handle. The breakout point for Wells Fargo would be a close higher than $32.50 and would measure to roughly $57.50 per share. That's a big number!
At the same time, the intermediate-term chart also shows us that there is a volume problem at these levels. In the following chart, I've highlighted the area that the stock has struggled with since May. On May 4, there was a huge volume spike that has served as resistance for five months. Until that price point is taken out convincingly, the best that can be expected is more sideways trading. Wells Weekly Volume Problem
Source: Prophet Financial Systems
Short-Term View
On a one-year daily chart, there is evidence of Wednesday's downgrade. Volume expanded to 100 million shares, but you almost need a magnifying glass to see it because the 500-million-share day on May 4 swamps everything else. Wells Daily
Source: Prophet Financial Systems
That high-volume spike carried Wells Fargo from $24 to $28. It is hard to see the stock trading below $24 again anytime soon. If it does pull back, volume will have to expand strongly for it to move below $28 and stay there. Clearly, Wells Fargo has significant earnings power. This can be seen in the latest earnings release. What concerns many investors and traders is whether the macroeconomic environment provides the opportunity for the bank to continue exercising that earnings power.
Although I do expect that Wells Fargo will test that $28 area more, it is hard to see it trading below there for any length of time. Sure it can happen, and if it does, I would look to be a large buyer from $20 to $24, assuming volume remains light. |
发表于 2009-10-23 17:48
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