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A strong earnings report from Bank of America (NYSE: BAC ) stock enjoyed Wall Street's collective attention Wednesday. Nevertheless, waiting for yesterday's excitable "mad money" to turn into today's profit-takers makes good business sense for would-be investors. Let me explain.
There's no doubt about it, BAC stock's Q4 profit and sales beat was solid. And investors largely agreed, sending shares soaring more than 7% in response to strong results punctuated by Bank of America's consumer banking business, lower taxes and aggressive efforts into digitization which are paying off big-time.
Off the price chart Bank of America's results received an equally excited response from CNBC's Mad Money front man James Cramer. Less than a month ago, price action like Wednesday's would have been pooh-poohed with remarks like "absurd" and "disconnected from reality" given the overriding bearish narrative of the day in BAC stock, in financials like JPMorgan (NYSE: JPM ) and Wells Fargo (NYSE: WFC ) and in the broader market.
Now and following Bank of America's results, the only "absurd and disconnected from reality" label was directed by the Mad Money host at investors too sheepish to buy BAC stock at a price that's cheaper than it has been in decades. While the words are Cramer's, the broader logic of the enthusiasm towards Bank of America is shared.
However, if like me you don't wish to wind up feeling like the proverbial mad money, there's better ways than simply, "Buy, Buy, Buy!"
BAC Stock Weekly Chart
Only a handful of weeks ago, most analysts were warning of a bear market in BAC stock was just beginning. It was during this period in late December when I laid out a bullish contrarian case for shares as Bank of America tested the upper range of a key longer-term support zone from about $22-$24.50.
Shortly thereafter, BAC stock challenged the lower support boundary with a low of $22.66 before turning aggressively higher as part of a V-shaped bottom. Now and with shares of Bank of America at $28.45 in just over three weeks, there are signs on the price chart warning today's bulls will be faced with some type of technical backing and filling.
Our caution at the moment is two-fold. Wednesday's reaction put BAC stock into an overbought position evidenced by its position outside the upper Bollinger Band, as well as its stochastics reading. Secondly, shares are testing a critical resistance area from roughly $27.50-$29. This zone is comprised of BAC's larger downtrend from its intermediate high set in March, the 50%-62% Fibonacci levels and 200-day simple moving average.
Like me, maybe you see resistance in shares as an obstacle to overcome. Still, the technical picture strongly suggests the odds are stacked against BAC stock moving higher in the short term.
Bottom line, Bank of America's squiggly price line likely needs to digest its gains before a sustainable rally through today's position on the price chart can occur.
BAC Stock Trade
For investors agreeable with our view and who wish to buy shares with more confidence, I'd put BAC stock on the radar and wait for a simple pullback pattern of three to several sessions before purchasing stock. That would serve the purpose of easing today's overbought condition while still keeping the potential for a second leg of price momentum intact.
Alternatively, if the anticipated profit-taking runs a bit longer or deeper, that's okay too. At this point and following earnings, buying Bank of America as it fills Wednesday's price gap and sets up a potential higher low pivot looks like a very suitable way to buy BAC stock. And in our view, buying on this type of weakness in shares is a much smarter way to own Bank of America, versus today's buyers who are likely to feel the pinch of a mad money investment.
Investment accounts under Christopher Tyler's management do not currently own positions in any securities mentioned in this article. The information offered is based upon Christopher Tyler's observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual.. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits .
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