Tuesday, October 11, 2016

Investment Banks Look Like They Will Sell Off Hard In Coming Months - 10-11-16

Click on Chart to Enlarge

This chart is Bank of America, BAC and is a weekly chart with the stochastics visible beneath.  Here we have basically a picture perfect pattern formation of a major top reversal.
A few points of observation:

  • Notice the decline off the 2015 highs created a larger (and faster rate of decline) decline than any pullback during the bullish run since 2011.  This creates what Gann referred to as an overbalancing after the end of a price trend.
  • The broad market indices like SP500 and Nasdaq have made new all time highs in 2016, but see that BAC has not rallied back to new all time highs.  I call this a non-confirmation of the broad market trend and implies future weakness in the stock.
  • The rally since the lows in the winter, has taken longer to form than the preceding decline, both from the all time highs, and the secondary lower top in Nov 2015.  This price action implies a new downward trend in that the larger and faster moves are in the downward direction.  the explosive, higher rate of change moves have been to the downside.

Click on Chart to Enlarge

This chart is a daily chart of BAC, so it is zoomed in some.  Further observations....
  • Notice the overlapping nature of the move up since February.  Boundary lines for the move up since February would form a rising wedge type pattern.
  • The rally is now peaking in an area of prior price congestion and multiple gaps downs from the winter decline.  This could be a chart/price based overhead resistance zone.
  • The MACD on this chart shows a major bearish divergence with price at the price peak yesterday.  This divergence at a lower high (than the beginning of the prior declining move) implies exhaustion and completion of a price move at a lower high, again indicating a downtrend likely to continue.
  • The recent poke to new highs and reversal below the old high, creates a mini failed breakout or double top, which may be a final smart money selling point as they sell into the break to new highs and attempt to unload right at the top.
From this point, a high quality top reversal pattern would be unlikely to make any further advance.  If a major price decline is to unfold, it would be ideal or not uncommon for price to gap down through the rising red trend line of the recent leg up since this summer bottom.

Assuming there is a sharp break of the red trend line, it would be quite common for price to rally up to very near the price level where it broke the trend line.  That would often occur with a daily stochastics rally to above the 50 mark.  And the most common short term reversal candlestick to occur at that backtest point on the chart would be a bearish engulfing pattern based upon my observations.

This quality of pattern will likely retrace back to at least the mid point of the recent rise.  It would take a major correction or bear market environment to fulfill a complete retracement of the rally since February.  But given the current position of the broad stock indices, the bull market could be topping here.

Similar comments apply to charts of SCHW, MS, AMTD, ETFC, CFG, C.

This will be interesting to observe in context of the upcoming US election, and a potential reversal of the long period of no interest rate increases by the Federal Reserve.  The next FOMC meeting and announcement of interest rate changes is November 2nd.  Election day is the following week on the 8th.

So it will be interesting to see if the Fed goes ahead and makes the rate change at the upcoming meeting just prior to the election.  But if not possibly wait and make the change either after the election or after inauguration.

From the observation of these price patterns on major national financials, it seems like the time for an "event" catalyst to bring the next major wave down.  


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