Bank of America's New 52-Week High

01/08/13 08:07:15 AM

by Donald W. Pendergast, Jr.

The bulls kick off 2013 with a powerful rally, with shares of Bank of America leading the charge higher.

Security: BAC
Position: N/A

Shares of Bank of America (BAC) are up by more than 80% since they made a multicycle low back on May 21, 2012, and with the stock now breaking higher -- and making yet another 52-week high in the process -- several key technicals are suggesting that this biggest of the big of all US banking conglomerates may still have more upside potential as we head into the new year. Here's a closer look now.

FIGURE 1: 52-WEEK HIGHS. Scanning for stocks trading at or near their respective 52-week highs can often be the first step toward locating attractive covered-call candidates. Note the huge daily trading volume in shares of Bank of America (BAC).

Graphic provided by: TradeStation.

Graphic provided by: TradeStation RadarScreen.

A terrific way to identify stocks making major new highs (lows) is to use one of the preinstalled templates in TradeStation's Radar Screen application. Let's say you want to scan for stocks that are trading near their respective 52-week highs (lows) (Figure 1) that are above $5 per share and which are also trading at daily volume levels that are greater than the average daily trading volume of the prior five days. You simply select from a list of stock groups (indexes, exchanges, sectors, or industry groups) and in a moment, you will have a nice list of potential trading candidates to evaluate.

In this example, once the list of 242 stocks and exchange traded funds (ETFs) were located, I simply clicked on the "Volume today" header to bring the biggest volume stocks to the top of the list. Note that of the seven stocks highlighted, five were near and/or trading at new 52-week highs.

Since this is a great way to locate high-momentum, large-cap stocks suitable for covered call trading, I then created a daily chart of Bank of America (BAC) by right-clicking on the stock's ticker symbol (Figure 2). No big surprises here -- BAC is in the midst of a very strong, long-term uptrend, one that is actually increasing its medium-term upward momentum, based on the spread between its 21- and 50-day simple moving averages (SMA). Even more important to covered call traders, BAC's medium-term and long-term money flows are also in bullish trends, indicating that the smart money is still in their accumulation phase of the stock.

It is true that they aren't accumulating BAC quite as aggressively now as they were back in February 2012, but the overall trend here is still overwhelmingly bullish for now.

FIGURE 2: BAC, DAILY. With powerful upward momentum, strong support levels, and increasingly bullish money flows in place, BAC is off to a very strong start in the new year.

Graphic provided by: TradeStation.

Intraday swing traders might still find plenty of low-risk long entry opportunities in the days and weeks ahead, but for more conservative traders, one of the better-looking trade opportunities in BAC appears to be that of putting on a (slightly out-of-the-money) January '13 $12.50 covered call trade. The $12.50 calls have a daily time decay of $1 (0.01), an open interest figure of more than half a million contracts and daily trading volume of more than 80,000 contracts. The bid-ask spread is also excellent, and by simply putting this trade on now and using the red 21-day simple moving average (SMA) trailing stop for the entire position, a very low-risk, high-probability trade setup appears before our very eyes.

If BAC continues to power strongly higher through January options expiration (Friday, January 19, 2013) and closes in-the-money, the stock will be called away. Conversely, if BAC stays above the 21-day SMA but fails to close in-the-money, the stock is still yours and you get to keep all of the call option premiums collected at the time of sale. You can then reevaluate the stock's technicals and fundamentals to see if you still desire to sell another call option against your BAC shares (remember, you sell one call for every full 100-share lot of BAC you own).

Overall, this looks like a great covered call opportunity. Be sure to limit your account risk to 2% or less, no matter how bullish you may be about this or any other stock. The best traders (and other long-lived survivors of the financial markets) always manage their risk well, and that's why they get to come back to play another day -- even after a series of losses. Trade wisely until we meet here again tomorrow.

Donald W. Pendergast, Jr.

Freelance financial markets writer and online publisher of the Trendzetterz.com S&P 500 Weekly Forecast service.

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Bank of America's New 52-Week High

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