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Bank Of America

03/14/11 09:10:27 AM
by Koos van der Merwe

Are bank shares worth a buy now?

Security:   BAC
Position:   Accumulate

We all know that the easy credit that banks gave led to the stock market crash of 2008. We also know that taxpayers' money was used by the banks to pay their managers and staff exorbitant bonuses. But let's face it, those managers did a good job of pulling their companies out of the red, paying back what the taxpayers lent them, plus interest, and are now once again showing decent returns, with balance sheets that look clean. Should we start buying bank shares as the market corrects? I believe that the answer is yes.

Graphic provided by: AdvancedGET.
Figure 1, a monthly chart of Bank of America, shows how the share price fell from a high of $55.28 in November 2006 to a low of $2.73 by February 2009 in a classic Elliott wave ABC pattern, a 95% drop. Since then, it has risen in a wave 1 and completed a wave 2. By all accounts it should now be entering a wave 3 upward as shown by the relative strength index (RSI), which is in a major bull trend. Volume fell as the price fell, also suggesting strength. Effectively, the share is a buy on any correction.

To determine the correct time to buy, I then turn to my daily chart.

Graphic provided by: AdvancedGET.
Figure 2 shows that the share price has risen from its low of $10.97 after falling from a high of $20.26 in April 16, 2010. The Elliott wave count as suggested by Advanced GET is suggesting that the price is currently in a wave 4, with a wave 5 target of $16.47 and $18.16. However, the probability index is only at 36%, rather low.

The share is also in a rising triangle. This is giving a target of $17.81 (15.36 - 10.97 = 4.39 + 13.42 = 17.81), a price somewhere in between the two fifth-wave targets. The RSI (12 period) is, however, not suggesting a buy as of yet.

Bernie Madoff has been accused of a Ponzi scheme, stealing billions of dollars from investors. He was sent to prison for life. Bank of America lost its shareholders 95% of their investment, yet not one manager has been prosecuted -- not yet, at any rate. Those who hold the shares and have lost can take comfort in knowing that they will start recovering their losses, however slow it may be. The share price is a buy on any correction.

Koos van der Merwe

Has been a technical analyst since 1969, and has worked as a futures and options trader with First Financial Futures in Johannesburg, South Africa.

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