Double Bottom Pattern on Bank of America (BAC)

(UPDATE 12/21/2010)

BAC had a breakout from the handle of the double-bottom pattern today, taking out the buy point (12.73) on a larger volume than yesterday. Target price $14.56. GL if you are trading.

-------------------------------------------------

Negative sentiment of November dissipated as soon as December hit (just like the head and shoulders pattern that everyone was watching was negated as soon as September hit).

Financial woes in Europe continue, and the US had the largest November monthly deficit on record. If you read the financial news, buying the stocks of financial institutions should be the last thing on your mind.

But guess what? They are the ones leading the market up. Here's Bank of America, whom many think may go Lehman pretty soon. Whatever their fundamental problem is (bad, very, very bad), the stock chart shows a clean double bottom pattern with the target price of $14.56, over 14% gain from the current price.


A buy point would be the middle of "W", which is $12.73. It could form a handle right about now, and if it does, the buy point would be still $12.73. RSI and MACD both show positive divergence.

If you don't worry about the fundamentals and don't worry about factors outside the control of the bank or of the US government (such as Ireland decides to default instead, or China's bubble suddenly bursts), it may be a quick trade if the breakout from the current level happens, with a very tight stop.

I have no intention of touching banking stocks and I certainly do not recommend any such stocks, but if you are interested in gambling on Wall Street banks, BAC seems to be one of the less extended. C is too extended, and GS doesn't look constructive. JPM and MS look range-bound, and they are both at the top end of the range. Do your DD.

S&P 500 Curve Ball: W-Bottom Instead?

As every trader was watching the Head and Shoulders Top formation on S&P 500 index and itching to go short, the market threw a curve ball. Instead of breaking down at the neck line around 875, the index held there for 3 days last week, and on Monday, bam! Tuesday, it took a lower volume rest (still managed to go up), and Wednesday it resumed big upward movement at a higher volume.

Is it possible that, instead of the bearish Head and Shoulders, we may have a bullish Double-Bottom formation?

The pattern we see on the chart seems promising:
1. The right side of W is lower than the left side;
2. Volume throughout the formation hasn't been too great, but it is increasing as the pattern completes;
3. The index has come back to the mid-point of W, which is the breakout point if the pattern breaks out to the upside.

One caveat: Double-Bottom pattern is a trend-reversal pattern. The existing trend immediately before the Double-Bottom was an uptrend. Darn! You could possibly argue that the bigger trend since last September was a one gigantic downtrend, so this formation could serve as a trend-reversal pattern.

Another caveat: High-frequency quant trading is now out in the open, thanks to Goldman Sachs. Just be aware that these computers and servers don't care about you and me, small retail investors and traders.