Wells Fargo (NYSE:WFC) is scheduled to release Q1 corporate earnings Friday before market open. Our expectation is a $1.12 EPS, the same as for the corresponding quarter last year, when earnings came in very short, at $0.98.
Analysts have cut this year's Q1 revenue outlook to $20.97 billion from forecasts of $21.7 billion for the same period last year. Q1 2018's actual results missed that estimate, coming in at only $21.55 billion. That disappointment followed five years in which all revenue results and almost all earnings met or beat estimates.
While the stock has gained around 6% since the start of 2019, in the last month it's dropped almost 2%, to close at $48.88 yesterday. With the technicals also suggesting a downward momentum, we believe the shares are likely to slip to at least $45.
The stock has been trading within a pennant, a continuation pattern late March. The pattern develops presumably on profit-taking after the drop from the $52.42 high, that confirmed the resistance of the 200 DMA, as well as on hopeful bulls.
The pennant, bearish in a downtrend, has fallen since March 21 below its short-term uptrend line since the December bottom. In the medium-term, the price has been trading within a descending channel since January 2018, in which both buyers and sellers have agreed on the outlook for lower prices.
The prices have fallen below the major MA’s, after the price — as mentioned — tested the 200 DMA, and the 50 and 100 DMA overcame the current price amid the pattern’s emergence. Also, the 100 DMA just demonstrated resistance over the 50 DMA.
The MACD’s short MA has been finding resistance below the long MA, amid the pennant’s formation, and the RSI has posted a lower peak early February, suggesting a downward path for momentum.
Trading Strategies – Short Position Setup
Conservative traders should wait for a decisive downside breakout of the pennant, with at least a 3% penetration to $46.75, to weed out a bear trap, then wait for a return-move to retest the pattern’s integrity, with at least one long red candle engulfing a green or small candle of either color, before committing to a short position.
Moderate traders would be content with a 2% filter to about $47, while waiting for the potential pullback for a better entry but not necessarily for proof of trend.
Aggressive traders may enter a short now, as the price is near the pattern’s top’s resistance, after finding resistance by the 50 & 100 DMA (and the 50’s bowing down to the 100 DMA’s resistance) and falling below the short-term uptrend line since the December rout, after the price found resistance by both the 200 DMA and the channel top.
Trade Sample
- Entry: $49
- Stop-Loss: $50, round psychological number above the pattern
- Risk: $1
- Target: $45, above December trough, the lowest since Oct. 4.
- Reward: $4
- Risk-Reward Ratio: 1:4