Wells Fargo Reports Earnings Under a 'Death Cross'

Wells Fargo & Company (WFC) is the third largest among the four "too big to fail" money center banks. The banking giant slipped from number two because of numerous scandals that rocked the company since early 2018. The bank reports second quarter earnings before the opening bell on Tuesday, July 16.

Wells Fargo closed the first half of 2019 at $46.43 on June 28, which became a key input to my proprietary analytics. The only level left over from the first half is its annual risky level, which appears out of reach at $63.39. The daily chart shows a "death cross," but the weekly chart has been positive since the week of June 21, when the stock closed at $46.89. Fundamentally, Wells Fargo is cheap with a P/E ratio of 10.29 and a generous dividend yield of 3.80%, according to Macrotrends.

Analysts expect the bank to post earnings per share (EPS) of $1.16 to $1.18 when it reports results on Tuesday morning. As problems came to light, the bank missed EPS estimates on July 13, 2018, and then again on Oct. 12. Things have improved in 2019, but the stock peaked at $52.42 on March 19.

The sales scandals surfaced in 2016, followed by issues in several business units including auto insurance, online bill pay services, and wealth management. Recently, the bank has resurrected its mortgage lending activities, which should be a driver of second quarter revenue. Beware of weakness in home equity loans as well as commercial and industrial lending. Another drag could be net interest income, given the lower U.S. Treasury yields. Other costs such as improving mobile banking applications and legal fees could provide drags on earnings.

In the long term, Wells Fargo stock is consolidating a bear market decline of 35% from its all-time intraday high of $66.31 set during the week of Feb. 2, 2018, to its Dec. 26 low of $43.02. The stock is up just 2.8% year to date and is up 10.1% from the Dec. 26 low. Wells Fargo stock set its 2019 high of $52.42 on March 19.

The daily chart for Wells Fargo

The daily chart for Wells Fargo shows that the stock has been below a "death cross" since Oct. 10, when the 50-day simple moving average (SMA) slipped below the 200-day SMA to indicate that lower prices lie ahead. Investors could have sold the stock at its 200-day SMA when it was $54.91 on Dec. 3.

When the stock set its Dec. 26 low of $43.02, that day became a "key reversal" when the close at $45.59 was above the Dec. 24 high of $45.10. The close of $46.08 on Dec. 31 was the first major input to my proprietary analytics. Still in play is the annual risky level above the chart at $63.29. The close of $47.32 on June 28 was another important input to my analytics. The horizontal lines are the value level for July at $43.41 and the third quarter and second half pivots converging at $47.98 and $47.99, respectively. The 50-day and 200-day SMAs are now at $46.37 and $49.07, respectively.

The weekly chart for Wells Fargo

The weekly chart for Wells Fargo is positive, with the stock above its five-week modified moving average of $46.95. The stock is below its 200-week SMA, or "reversion to the mean," at $52.39. The stock has been below its "reversion to the mean" since the week of Dec. 7. The 12 x 3 x 3 weekly slow stochastic reading ended last week at 50.11, up from 40.43 on July 5. 

Trading strategy: Buy Wells Fargo shares on weakness to the monthly value level at $43.41 and reduce holdings on strength to the 200-day and 200-week SMAs at $49.07 and $52.39, respectively. Breaking out above quarterly and semiannual pivots at $47.98 and $47.99, respectively, is the key to a positive reaction to earnings.

How to use my value levels and risky levels: Value levels and risky levels are based upon the last nine weekly, monthly, quarterly, semiannual, and annual closes. The first set of levels was based upon the closes on Dec. 31. The original annual level remains in play. The weekly level changes each week. The monthly level was changed at the end of each month, most recently on June 28. The quarterly level was also changed at the end of June.

My theory is that nine years of volatility between closes are enough to assume that all possible bullish or bearish events for the stock are factored in. To capture share price volatility, investors should buy shares on weakness to a value level and reduce holdings on strength to a risky level. A pivot is a value level or risky level that was violated within its time horizon. Pivots act as magnets that have a high probability of being tested again before their time horizon expires.

Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.