Bank of America is having a great year so far. The mega bank beat earnings and revenue estimates in the first quarter and was one of the top performers during the Fed’s recent stress test, which allowed it to boost its dividend by 25% and further support its share buyback program. In addition, the company is expected to deliver $2.53 earnings per share this year – 38% higher than 2017. That is Bank of America the business. Bank of America the stock is a different story.
BAC reached $33.05 in mid-March and has been in pullback mode ever since, losing almost 15% as of last week. There seems to be a divergence between the optimistically looking fundamentals and the market price, which is not at all surprising, since these two go hand in hand just as much as they don’t. This means that either the fundamentals are painting an unrealistically rosy picture or the stock is undervalued and the bulls have some catching up to do. To find out which of these two assumptions is correct, let’s take a look at Bank of America’s current decline from an Elliott Wave point of view on the 30-minute chart below.
The chart visualizes BAC’s drop from $33.05 to $28.01 so far. Its wave structure suggests that a simple A-B-C zigzag correction has been in progress since March 12th. First, there is a textbook five-wave impulse in wave A, labeled 1-2-3-4-5, where the sub-waves of wave 3 are also clearly visible. Then there is an expanding flat correction in the position of wave B, whose waves (a) and (b) are double zigzags, labeled w-x-y. And finally, an ending diagonal wave C appears to be in its final stages right now.
If this count is correct, we should expect a slight dip below the $28 mark in wave 5 of C to occur as early as this week, followed by a sharp bullish reversal. According to the theory, once a correction is over the larger trend resumes. BAC was clearly in an uptrend prior to this A-B-C retracement, so targets above $33.05 are still very reasonable. It looks like the Elliott Wave principle and the fundamentals agree that Bank of America deserves a higher valuation.
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