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Is Bank Of America's Stock About To Reward Risk Takers?

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Today’s price action in Bank of America (BAC) shares marks what could be the final stage of the payoff for risk takers as the stock moves from $15 to $20 a share–a price target identified in the stock’s price action as early as April 2012. Two years ago anyone interested in holding shares of the company faced a very serious risk. At that time option traders priced in the possibility that shares of the Raleigh, North Carolina based banking giant would either become worthless or would more than double in price over the following two years.

Any buyer at that time had to face the realistic possibility that the company would enter bankruptcy, but it seems the risk has paid off so far. Since November of 2011 the company’s shares have nearly tripled in price. Of course it didn’t hurt that Warren Buffet made what was tantamount to a hard-money loan to the company by purchasing shares in the stock. But both he and existing Bank of America shareholders came out winners. His de facto endorsement of the company’s management led the way for new investors to take the stock seriously again.

Today after the stock’s meteoric rise, a prudent investor has to wonder whether the stock’s upward trend is exhausted or whether there is still opportunity to be found in this stock. To be sure the company faces the possibility of stiff legal challenges and regulatory hurdles, but with real estate prices rebounding somewhat and political battles shifting away from finance towards healthcare, perhaps the risks have at least partially abated. That particular kind of risk is impossible to quantify, so it is reasonable to turn to the oldest form of crowd-sourced research known to the markets, namely Technical Analysis.

Consider the following two charts.

The first is what is known as a point and figure chart. This style of chart removes time and volume and concentrates only on price changes. The methods for reading such charts are not commonly known, but the formation shown in figure 1 (below) is a setup which projects the potential for a price move starting at $10 and moving as high as $20. The move initiated right at the time of BAC’s heaviest option premium, so the chart pattern setup was corroborated by the extreme prices of the stock’s options.

Figure 1: BAC price action targets $20

The chart shows a vertical move which isn’t finished yet. But since the point and figure chart compresses time, it is difficult to know at what moment the final push towards $20 could initiate. That’s where the second chart comes in. Figure 2 (below) shows the price pattern over the last six months. Just today that pattern appears to have begun a major change.

Figure 2. BAC breaking out of a four-month long channel.

When stocks consolidate their price activity into a bounded range for an extended period of time, then the balance of buyers and sellers appears to have reached a kind of equilibrium. Once the price moves beyond the bounds of that range, then the equilibrium has begun to be disrupted. If the price of the stock breaks out of the channel, a short-term opportunity appears for traders and investors alike.

In the case of BAC the share price has broken out of a channel-like flag pattern. The upward target of this breakout is about $16.50, just over a 10% increase, projected to complete in the next couple of months. A move like that could easily spark a run towards the ultimate price target of $20 during the year 2014.

Category: Bank

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