Looks Like Bank of America is Heading Lower

Financials were definitely the place to be throughout 2012. Isn't it hilarious that they were the best performing sector for the year? As much hate as that space gets, to watch them grind higher in the face of all that pessimism has been a beautiful thing to watch. Isn't the stock market awesome? And, believe it or not, Bank of America was one of the darlings of the sector. $BAC doubled in price last year. A 100% move ladies and gentlemen.

But I have to say that looking at it today, I think there's a strong chance of a breakdown. Remember that this monster up move in the stock came within the context of a horrible secular bear market. In fact, the move last year retraced just 50% of the prior sell-off in the stock. So in the big picture, nothing has changed. It's still Bank of America - the butt of all the jokes.

Price wise, it certainly looks vulnerable in the short term. This is a daily bar chart showing the uptrend from last summer. As we approach this trendline, there's a nasty bearish divergence going on in momentum. The new 52-week highs in February couldn't hold for more than a day. And as price tried to breakout, the Relative Strength Index was already rolling over pretty hard. This $11 level represents both the uptrend line and support from the past 10 weeks.

I wouldn't be surprised to see at least a 10-15% correction in this name. Closes below 11 would confirm that and can be used as a reference point to short against. And it's not just this one company, I think Financials as a group could correct as money continues to flow into the more defensive sectors. So yea sure, $BAC could hang on to this support, money can start flowing back into financials again, and US Stocks could rip into all-time highs and not look back for months. Anything can happen. I just don't think that's the likely scenario.

I know I haven't exactly been Mr. Optimism lately (See Exhibit A, B, C, D, & E), but it's because I just don't see it. I try to stay as objective as possible, I really do. At the end of the day I don't really care in which direction the market goes. I don't run a long only fund. I'm not an analyst at a sell-side shop that needs to keep clients thinking positively. I can trade whatever I want and in whichever direction I want. So every day I rip through hundreds and hundreds of charts. I look at countries, commodities, and currencies from all over the world. And I still can't find a reason to be optimistic about the short-term prospects for risk assets.

I think markets head lower and Bank of America leads to the downside. Plain and simple. But if and when I see evidence that my opinion is wrong, I'll be the first one to change my mind, admit it and blog about it.

But that's not today.

Tags: $BAC $XLF $SPY