On August 8 I outlined a trade view
of buying shares of large cap US banking stocks such as Wells Fargo as the financial sector of the US stock market looked poised to play catch-up with the broader indices. Since then WFC stock has rallied, which warrants an update on this trade.
The price action in interest rates and interest rate-sensitive instruments such as banking stocks since last Friday's speech by Fed chair Janet Yellen has been all over the place. However, banking stocks like Wells Fargo despite some confusion last Friday managed to rally nicely on Monday.
On the multi-year weekly chart we see that this most recent bid in WFC stock has once again pushed it up against the upper end of the trading channel (black parallels) that has been in place since last 2015. At the February lows the stock managed to hold its 200-week simple moving average (red line) as support on a monthly closing basis and this renewed strength now looks to point the stock further to the upside. In other words, a breakout from the trading channel to the upside is well on the cards.
On the daily chart we see that since I first shared this trade on August 8 WFC stock mostly waffled sideways, but never really broke lower, i.e. buyers continued to support the stock. On August 29 the stock finally popped to the tune of 2.16% and broke out past horizontal resistance near the $49 mark. Although the stock now also bumped into its red 200-day moving average, which may act as some resistance, a better upside target near the May and June highs around $51 still makes sense.
Management and risk description
Like any momentum trade, should WFC stock reverse sharply after Monday's rally, then the bull case for the trade may be temporarily over. In that case from a swing trading perspective it would be better to get out of the trade and look to repurchase the stock upon a notable bullish reversal.
: Buy the stock at $49.30 or higher
: A daily close below $48.90
: 24 weeks
— Edited by Clare MacCarthy
Non-independent investment research disclaimer applies. Read more