Wells Fargo was featured as a potential short candidate the weekend of September 11, 2016.
Prior to the weekend analysis, we decided to open a position in November 42 puts. Our decisions and reasoning follows, in this short explanation of a bearish trade on WFC.
Summary
Hindsight is 20/20 however, using simple strategies like the example featured herein, will elevate your trading to a higher level of profitability and consistency. New traders should utilize this strategy each time they consider a potential position. Ask yourself…….
Where is price relative to the 9/20ema?
Below is the daily chart we reviewed with members, in conjunction with the watch list commentary and short setup for WFC. Note price has just moved below the referenced moving averages. Friday price action dropped below the key 200ma. Leading into the weekend, the New York Times featured an article that caught our attention, which triggered the decision to buy November puts.
Wells Fargo Fined $185 Million for Fraudulently Opening Accounts
The news and the fact that price dropped below the 9/20ema and 50/200ma on above average volume “sealed the deal”, so to speak. Obviously, those in the know had an opportunity to exit prior to the news, as volume peaked on Thursday. Additionally, a SAR sell signal triggered on Wednesday.
Paying attention to all of these factors makes the difference between a new trader and a professional.
The daily chart as of Monday’s close, shows price below all the moving averages. You should also focus on what happened every time price tried to regain the 9ema. Price action is rejected. The SOTEMA (slope of the emas) is currently severe, as you might expect. This is a bearish development, which further supports our conviction.
Rule: When price is below the 9/20ema and the moving averages turn lower, look for rejection at this zone. We are short.
Additionally, longer term swings can be managed by watching what happens to price as it tries to move back above the 9/20ema. In other words, you need to constantly move your stops lower (trail) and let the trade work. Our puts have doubled (+130% on Monday).
That’s not the end of the story however. The weekly also lost key levels. Price is below the 200ma on this time frame. If bulls cannot defend the 43.00 (+/-) zone, this stock is in trouble, pointing to lower prices. Also note RSI, MACD and STO. MACD below zero line is bearish, hence the descending channel on the weekly from mid-2015.
The monthly chart shows increasing weakness. We started the month of October on a sell signal. In addition, this monthly chart reflects previous pivots, where one might anticipate a bounce.
Had it not been for the constant drum beat of negative news, we may have bounced back to the upper part of the weekly channel. That isn’t the case, which leads us to believe that the worst is yet to come. Politicians are grand standing for their constituents. That’s never a positive development.
What follows is a brief synopsis of what lies ahead for WFC.
“On Thursday, these illegal banking practices cost Wells Fargo $185 million in fines, including a $100 million penalty from the Consumer Financial Protection Bureau, the largest such penalty the agency has issued.
Federal banking regulators said the practices, which date back to 2011, reflected serious flaws in the internal culture and oversight at Wells Fargo, one of the nation’s largest banks. The bank has fired at least 5,300 employees who were involved.
In all, Wells Fargo employees opened roughly 1.5 million bank accounts and applied for 565,000 credit cards that may not have been authorized by customers, the regulators said in a news conference. The bank has 40 million retail customers.” – courtesy New York Times 9/9/16
The next time you consider a trade, first consider where price is relative to the 9/20ema. The rest of your analysis will fall into to place, as you weigh the potential strength of your conviction.
Happy Trading – CV
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