Bank of America (BAC) shares fell sharply recently after releasing earnings on Friday.
On Monday, shares crossed under the major Support “Line in the Sand” from the daily and weekly timeframe, so let’s take a quick look at that level and what to watch as investors grapple with the reality of a potential major breakdown of support.
First, BAC Daily:
I’ll oversimplify the chart above by saying $14.25 is the official “Line in the Sand” between Bulls and Bears.
For the moment, price remains under this line in a bearish breakout on high volume – but admittedly, volume due to Friday’s earnings.
The $14.25 level supported price in November 2009 and February 2010, but sellers pushed shares under this level at the July lows and recently after earnings.
One can see this to be a very important short-term support level, but let us pull back the chart perspective to see why this is not just a short-term level to watch … but something much bigger.
The weekly timeframe reveals the critical importance of the $14.25 level for investors in Bank of America.
Notice that price initially resisted at this price in December 2008, March/June 2009, and then after price broke above this level, $14.25 became future support on the November 2009, February 2010 downswings in price.
We call this the “Price Polarity Principle,” where prior resistance becomes future support… and vice versa.
Beyond the obvious support at $14.00 per share, we have a persistent negative volume (not surprising) and momentum divergence – both of which undercut the April high at $20.00 per share – that’s bearish.
Keep in mind that support and resistance levels are not magic, and that prices are driven by supply/demand – not chart indicators.
If bulls can overcome the sellers who are shorting (or selling stock) under the $14.00 level, then price will rise and those same bears will be forced to cover as they place stops above $14.00.
However, if sellers overtake buyers under this critical level, then we could see much lower prices ahead in an official price trend reversal and new confirmed downtrend in BAC – which could bode very poorly for the overall stock market.
Even if you don’t invest or trade BAC shares, keep a close eye on what happens over the next few days/weeks here at $14.00 as the official Line of Demarcation between buyers and sellers.
Corey Rosenbloom, CMT
Afraid to Trade.com
Follow Corey on Twitter: http://twitter.com/afraidtotrade