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Over the past year-plus, Bank of America (NYSE: BAC) has been caught in a trading range that shows the high and low at approximately 10% from the midpoint of the range. The stock is sitting just below the upper end of the range right now, but will the third attempt at breaking out above the range be the one that works? I don’t think so.
Looking at the daily chart, we don’t really see the range, as it is more visible on the weekly chart. On the daily chart what we do see is that the stock is overbought based on the 10-day RSI and the slow stochastic readings. The last time these indicators were both in overbought territory, we saw a mild pullback and then the stock charged higher. However, the time before last was in July, and we saw the stock fall from over $18 per share on July 23 to below $15 per share one month later.
When we step back and look at the weekly chart, we see the range in its entirety. The stock entered the range in June 2014 when it moved above the $15 level. Since then the stock has closed one week above $18 and one week below $15.
We see that the weekly oscillators are moving toward overbought levels but haven’t quite reached overbought status yet. The 10-week RSI is up above 60, but that is about as high as it has gone in the last year before the stock reversed course.
Another reason I don’t think the stock breaks through the resistance at the top of the range right now is the sentiment toward the stock. The short interest ratio on Bank of America stock is a paltry 0.98 right now. In addition, the analyst ratings are extremely bullish, with 26 “buy” ratings, four “hold” ratings and one “sell” rating. This type of extreme bullish senitment is unusual – especially for a stock that has been range-bound for approximately 16 months.
So what should you do at this time? If you own Bank of America stock, I recommend selling out-of-the-money covered calls on the stock. The premiums you collect will help boost your return on the stock and you can maintain your holdings.
If you don’t own the stock, I would look to short it for a quick trip back down to the $15 area. It won’t be a huge return on the trade, but it should get you a quick 15% return. You could also look to buy put options in order to take advantage of the next trip down to $15.
If you are looking to buy the stock, wait until it moves back down to $15 and then ride it back up to $18 for a quick 20% profit.
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