May 28th, 2008

Bank of America (BAC): A Chart Study

I reader just asked “Are you seeing a technical breakdown now in Bank of America??” I was going to respond in the comments but decided that showing the chart might make for an interesting discussion about the challenges in chart reading.

Before beginning, I should point out that my orientation is longer-term (i.e., more than 3 months) and for bigger moves (i.e., greater than 10-15%). I usually have too many stocks in my portfolio to monitor each one of them as short-term, small gain trades. Of course, if I read a chart incorrectly (which does happen, even to the Guru) or conditions change dramatically for the worse, then I will cut my losses and quickly sell a losing position.

But on to BAC, Bank of America. As mentioned here before, my Telechart screen is set to present three charts simultaneously (10-month/single-day bar, 4-year/2-day bar and 12-year/4-day bar) so I can see all past and potential future resistance and support levels. Here are two BAC charts:

On first chart above, a symmetrical triangle pattern is visible with the bottom boundary apparently having been broken. In my experience, symmetrical triangles are rarely bottom or base patterns; they are usually consolidation patterns where the trend preceding the triangle resumes after the breakout/breakdown. Traditionally, the triangle is midway in the total move with the extent of the move before (in terms of percentage) duplicated in the extent of the move after the triangle.

In the chart above, I inserted a dotted line because symmetrical triangles are reliable and often morph into channels (which can be a bottom/base). That dotted line, or something close to that level, could be the bottom boundary of the base with the upper boundary extending from one of the upper pivot points of the symmetrical triangle (either the December or January pivot points). Two significant contributing factor to how this turns out are the state of the general market and the condition of the Money Center and Super-Regional Banking Industry Groups.

Let’s zoom out for a longer-term perspective.

When viewed from this, the symmetrical triangle becomes less compelling and the stock’s downtrend becomes more pronounced. Using the 50% rule of thumb, it looks more likely that the 32% decline preceding the triangle (from 52 to 35) will be replicated after leading to a further decline to the 25-26 area.

I’ve found that slanting trendlines (connecting rising or falling pivot points) are less reliable than horizontal trandlines clearly marking resistance/support levels. That’s why I added those lines to the above chart.

Hope this adds to your understanding of charting. As far as BAC is concerned, this is a long way of saying “Yes, I agree with you. BAC did breakdown“…..unless it morphs into a horizontal channel.

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