Much of the stock market has been in “wait-and-see” mode since the election, but some sectors have performed exceptionally well. Among these are the financials.
Without doubt, the new president is seen by the financial sector as an ally whose promise of improved economic trends to come in the next four years would lead to profitable expansion, notably for the big banks.
One entry in this field that is especially attractive as of early March is Wells Fargo (WFC). As “big banks” go, WFC is right up there. It’s the second largest bank in the world (by capitalization) and the third largest in the United States. Its brokerage segment, Saint Louis-based Wells Fargo Investments is the third largest in the States.
All of this means that WFC is well positioned to benefit from improved economic times, including investment, lending, personal banking and both domestic and international financing and banking activities. The company may also be a strong contender to absorb smaller regional banks that might struggle to compete even in a strong market.
This optimistic outlook is supported by the price chart as of early March. The bullish trend appears gradual, but there is one particular price pattern pointing to exceptional strength. The areas highlighted in “Building a solid base” are retracements; short-term price movement in the direction opposite of the prevailing trend.
Retracement is an essential attribute within a trend, caused by profit-taking and opposite sentiment (in this case, bearish sentiment in a bullish trend). A trend without retracement is vulnerable to a sudden collapse, so frequent retracement only adds to the strength of the trend. In the example of WFC, six short-term retracements occurred during a four-month period.
Besides strengthening the uptrend, the retracements also exhibited a repetitive pattern, making future retracements easy to spot. There was a consistent interaction between the upper Bollinger Band (higher solid red line) and the t-line (the blue line representing an eight-day exponential moving average). Every one of the retracements was initially signaled with a price move above the upper band. This was followed by a decline just below the t-line and then a strong upward move to resume the bullish trend.
The fundamentals work because WFC and other big banks will benefit from the economic improvements expected in coming months and years. The technical signals work to bolster the fundamental outlook and also serve as near-term support levels. Retracement as a predictable pattern strengthens the bullish price move and provide easy benchmarks for support and resistance, as well as stop levels. Until a bearish reversal appears, this is expected to continue into the future.