Bank of America Corporation (NYSE:BAC) gapped down 1.7% on Wednesday morning, but bulls came in and bought the dip, which caused the stock to rise up and completely fill the gap.
The price action may serve as the next consecutive lower low in the downtrend pattern that Bank of America has been trading in since March 22, when the stock topped out at the $44.63 level.
A downtrend occurs when a stock consistently makes a series of lower lows and lower highs on the chart.
The lower lows indicate the bears are in control, while the intermittent lower highs indicate consolidation periods. Traders can use moving averages to help identify a downtrend, with descending lower timeframe moving averages (such as the eight-day or 21-day exponential moving averages) indicating the stock is in a steep shorter-term downtrend and descending longer-term moving averages (such as the 200-day simple moving average) indicating a long-term downtrend.
A stock often signals when the lower low is in by printing a reversal candlestick such as a doji, bullish engulfing or hammer candlestick. Likewise, the lower high could be signaled when a doji, gravestone or dragonfly candlestick is printed. Moreover, the lower lows and lower highs often take place at resistance and support levels.
In a downtrend the "trend is your friend" until it’s not and in a downtrend, there are ways for both bullish and bearish traders to participate in the stock:
- Bearish traders who are already holding a position in a stock can feel confident the downtrend will continue unless the stock makes a higher high. Traders looking to take a position in a stock trading in a downtrend can usually find the safest entry on the lower high.
- Bullish traders can enter the trade on the lower low and exit on the lower high. These traders can also enter when the downtrend breaks and the stock makes a higher high, indicating a reversal into an uptrend may be in the cards.
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The Bank of America Chart: Bank of America’s most recent confirmed lower low was printed on April 7 at $38.85 and the most recent lower high was formed at the $40.40 level on April 11. If the stock closes the trading day on Monday near its high-of-day price, it will print a bullish hammer candlestick, which could indicate higher prices will come on Thursday.
If higher prices come, Wednesday’s low-of-day will serve as the next lower low. The most likely scenario will then be that Bank of America bounces up to print another lower high.
- There is a possibility Bank of America has printed a bullish triple bottom pattern near the $38.21 level, when combined with the price action on March 7 and March 8. If the pattern is recognized, traders and investors can watch for a possible trend change over the coming days.
- Bank of America’s relative strength index (RSI) fell to the 30% level on Wednesday, which also indicates a bounce may be in the cards. When a stock’s RSI reaches that level, it becomes oversold, which can be a buy signal for technical traders.
- Bank of America has resistance above at $40.06 and $41.51 and support below at $37.79 and $35.72.
