The coronavirus panic coupled with the Fed’s emergency 50 basis points rate cut sent bank stocks plunging very quickly. Bank of America, one of the “too big to fail”, is down almost 30% from its December 2019 high.
However, BAC is in a much better financial shape than ten years ago. In fact, the company seemed to be such a good investment that Warren Buffett made it the second biggest holding in Berkshire Hathaway’s portfolio.
Yet, the stock fell from $35.72 to $25.10 in less than three months
Obviously, the problem is not in Bank of America’s fundamentals. In order to prepare for this crash, investors had to pay attention to the market’s mood instead. That is what we did when we last wrote about this stock. Check out the chart below, published on October 22, 2019.
Two full months before the price peaked, our Elliott Wave analysis revealed the first warning signs. The stock was rising in wave (5) of the impulse pattern that began in 2011. Every impulse is followed by a correction in the other direction. Besides, wave (4) was a triangle and triangles precede the final wave of the larger sequence.
Ahead of the Selloff in Bank of America
Hence, we thought “wave (5) is going to lift Bank of America stock to $35 – $36 a share.” On the other hand, “a three-wave correction back to the support of wave (4) near $22 should be expected” once wave (5) ended. Less than three months later now, the updated chart below shows what happened.
Bank of America reached $35.72 in wave (5) on December 27th, 2019. Last week, it closed at $25.71 after reaching an intraday low of $25.10 on Friday. The three-wave retracement the Elliott Wave principle warned us about is obviously in progress now.
If the count above is correct, waves (b) up and (c) down remain. It looks like the situation is going to get worse before it gets better. The stock can decline to roughly $20 a share in wave (c), implying ~23% more downside. Bank of America may look cheap now, but it can still get cheaper.
Similar Elliott Wave setups occur in the Forex, crypto and commodity markets, as well. Our Elliott Wave Video Course can teach you how to uncover them yourself!