Falling Down the Wells

Whoops!…What’s this?…Bad news is bad news after all?

Yesterday morning, Wells Fargo posted a cosmetically pleasing profit of $3.2 billion, or double the tally from the same quarter last year. So when the opening bell sounded, exuberant investors rushed into the market and bid up the shares of WFC.

But then a very strange thing happened; the buying frenzy dissipated into a selling panic, as a variety of analysts started poking holes in Wells Fargo’s “strong” report. In particular, analyst Dick Bove of Rochdale Securities, complained that the bank’s entire profit for the quarter came from a $3.6 billion profit on a hedging transaction. The bank’s operation’s, meanwhile, produced results that ranged from mediocre to poor.

Bove slapped a “sell” recommendation on the stock, and more than one investor seemed to heed the advice. The stock slumped 7% from its high print of the day to its closing price of $28.90.

Technically oriented traders couldn’t care less about WFC’s income statement mumbo jumbo…but they would probably care a great deal about the textbook “outside day reversal” pattern that WFC etched onto trading screens yesterday.

Outside-Day Reversal

This ominous pattern features a share price that exceeds both the prior day’s high and the prior day’s low – i.e., “outside” – and then ends the trading session on or very near the day’s lows. A “textbook” reversal pattern should also feature a big surge in volume.

In other words, WFC’s reversal pattern has it all! – higher high, lower low and a huge spike in volume. Yesterday’s trading volume of 113 million shares doubled the average daily volume of the last four months! So if you added up all the component to yesterday’s reversal patter, you would probably begin to deduce that a new bearish trend will unfold over the coming days. Incidentally, the KBW Bank Index (BKX) of 24 financial stocks also produced an outside day reversal yesterday.

This technical formation does not guarantee a selloff, of course, but it does suggest that WFC might stop going up…at least for a while. This pattern also suggests that bad news is actually bad news…which would be REALLY bad news for a stock market that relies more on hope than substance.


Eric J. Fry,
for The Daily Reckoning

The Daily Reckoning