In early August, Wells Fargo and Company (WFC) broke out along with the markets and surged to new multi year highs. Over the last couple of weeks though, just like the markets, WFC has pulled off of those highs and headed back to the scene of its earlier breakout. This breakout occurred around the mid-$34 price level which has been a significant level of resistance for WFC for years. Theoretically, this resistance should now act as support as buyers that missed the earlier move get a second chance to jump in. An important part of my analysis of a potential trade is to examine it from multiple time frames, a concept I’ve written about in greater detail in the past.
First, lets examine a weekly chart of WFC. As we can see, the $34 area has been a point of pretty strong resistance over the last three years. WFC failed to break above this area in early 2012, but was able to rebound relatively quickly and retry a breakout this summer.
After stalling out but holding steadily at resistance, it was able to build up enough steam to finally break through this significant wall and head higher a couple of weeks ago. It has now come back to this area and initially has found support.
Taking a closer look on the daily time frame, we can see that WFC has pulled back in an orderly fashion after the strong two day breakout that took it all the way to $36.60. Stochastics appears to be bottoming out indicating that selling momentum is waning and the major moving averages are all bullishly aligned as they provide an additional cushion of support to the price action. While this is a typically bullish pattern, there are a couple of negatives that are sullying this chart a bit.
First, note the volume pattern on the retracement. Huge volume spikes as price drops are never a good thing to see during consolidation at highs as they are a sign of distribution. The preferred pattern is one of subdued volume as price quietly drifts down. Also, a couple of the down candles are a little bigger than I would prefer showing that there is some disagreement on price at this level instead of the smaller candles indicative of profit taking. However, despite these negatives which may just be byproducts of a weak market, the overall setup is still promising and one to watch for positive behavior in the coming days.
Finally, lets zoom in to a 30 minute chart showing us the intra-day action on WFC. While the longer term charts provide us with the overall backdrop and trade setup, it is the shorter time frame that eventually confirms whether a trade setup has fully materialized and what the proper entry will be. WFC has been in an obvious descending channel for a couple of weeks now that has been herding the price action slowly down to the key support/resistance level around the low $34’s.
After bottoming out in late September, WFC had spent the first couple of days of October trying to challenge the top of this channel and break its recent descent. There is very little room left between this channel and the support it has found at $34.29 and WFC will have to either break above this channel or break down through support in the coming days. Keep an eye on the markets as well, as they will likely provide a strong clue on the eventual resolution of this potential setup on WFC.
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