Breakout Alert: Wells Fargo & Co (WFC) Stock

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Banking stocks and the rest of the financial sector led the market higher on Tuesday for a second straight day. This resulted in plenty of chart breakouts in important bank stocks such as Wells Fargo & Co (NYSE: WFC ). One day does not make a new trend, but the widespread rally in financial stocks - which follows a two-month sideways march - looks promising for higher prices in WFC stock.

Classic textbook technical analysis teaches that price action is all that matters. It's undeniable: Price is what gets market participants paid. However, over the course of my career, I have come to respect that the news, market structure and some fundamental analysis significantly improves the probabilities of profitable trading and investing.

The rally thus far this week in WFC stock and other bank stocks has marked several charts with clear breakouts from a two-month consolidation phase. But we must be able to contextualize this move, which came on the back of hawkish commentary out of the Federal Reserve and Fed chairwoman Janet Yellen.

Being able to decipher context in any stock move based on the news is important for any sector or industry group. However, I constantly see investors fail to do so in the financial sector, which naturally is sensitive interest-rate levels. In other words, when the Fed sounds hawkish, bank stocks (especially in this environment) tend to pop. A dovish Fed has a tendency to lead to lower interest rates, and thus weighs on financials.

And that brings me to our analysis of Wells Fargo.

WFC Stock Charts

Looking at the multiyear weekly chart of Wells Fargo shares, we see that the post-election rally this past November cleanly broke the stock back above its 50-week (yellow) and 200-week (red) moving averages.

This also coincided with a breakout of the big bull flag-like pattern that I marked with the two purple-dotted parallels.

Click to Enlarge

WFC stock then slipped into a sideways pattern (marked by the blue box), which thus far this week it has marginally broken out of to the upside.

From this angle, WFC stock now looks poised to overtake its 2015 highs and push toward $60 as a next upside target (barring any quick bearish reversal, of course).

On the daily chart, we see that during the two-month consolidation phase, Wells Fargo in mid- to late January and through early February continuously found support at its rising 50-day moving average (yellow).

Click to Enlarge

This support ultimately helped WFC stock attempt a breakout of the consolidation phase on Monday. The stock finally broke higher on Tuesday on a daily closing basis.

Active investors and traders could look to try Wells Fargo stock from the long side. The $60 area is your next upside target. Meanwhile, respect any bearish reversal that closes the stock back below $56.80 as a potential "pop-and-drop" move.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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