What Does Dow's Theory Tell Us About Bank of America?

Yesterday, Bank of America (BAC) completed its announcement of the purchase of Merrill Lynch (MER). Although I have stayed out of the banking sector overall, I was curious to see what Dow's Theory says about Bank of America. I will examine four cycles for BAC and see if there have been any predictive trends.

Starting with the period from August of 1982 to the top at June 1986 we see that BAC went from $2.94 to $13.88. According to Dow's Theory, the price of BAC was expected to fall from $13.88 to any of the following three support levels:

• $10.23
• $6.58
• $2.93

BAC actually bottomed at $3.88 in December of 1987.

Next we have the period from December 1987 to the top at August of 1989. The price rose from the $3.88 level and peaked at $13.75. According to Dow's Theory the price of BAC was expected to fall to the following three levels:

• $10.46
• $7.17
• $3.88

BAC actually bottomed at $4.22 in October of 1990.

Next we have the period from October 1990 to the top at July of 1998. The price rose from the $4.22 level and peaked at $44.22. According to Dow's Theory the price of BAC was expected to fall to the following three levels:

• $30.89
• $17.56
• $4.22

BAC actually bottomed at $18.16 in December 2000.

Finally we have the period from December 2000 to the top at November 2006. The price rose from the $18.16 level and peaked at $55.08. According to Dow's Theory the price of BAC was expected to fall to the following three levels:

• $42.78
• $30.48
• $18.16

BAC actually bottomed at $18.44 on July 15, 2008.

The next question becomes, are there any noticeable patterns that Dow's Theory provides us? Generally, each period from peak to trough (3 out of 4 times) BAC's price fell to the previous low level. What does this mean for Bank of America stock? It means that the $18.44, plus or minus 5%, is the lowest this stock will go.

As hard as it is for me to believe that the bottom is in on this stock, I have to defer to Dow's Theory for some sort of guidance. Since Bank of America is now a bellwether stock for the banking industry, Dow's Theory is saying that either this banking crisis has hit bottom (for now) and might trade up from here (possibly in a range) or that anything below $18.44 is going to be chaotic.

Let's watch and see how well BAC holds above the $18.44 level. I suspect that this price will be revisited in the near term. However, given all the wild moves in the market I can't be certain of what is to come after that. Did I mention that BAC has increased its dividend for over 30 years in a row? This should be interesting.

Disclosure: None

Comments

[venividivici:]

Goobledegook.
By far the most important thing in investing is to try to look forward and not to look back. That's history, it's gone. Now the formerly totally indeciferable Mr Greenspan said yesterday that the problems facing the financial world are perhaps the greatest in the last 100 years.Maybe you should be writing about whether BAC will survive given Lewis' latest takeover move on Merrill which seems to verge on insanity.

2008 Sep 16 05:45 AM

[Steven Hansen:]

the real question is the amount of toxicity at MER. application of stock market statistical data which ignore specific component issues are doomed.

2008 Sep 16 06:12 AM

[George Edwards:]

And through all those downturns BAC continued to increase the dividend every year.

2008 Sep 16 08:08 AM

[DownOnMyLuck:]

What happened before the merger with Nationsbank is not very relevant to todays BofA.

2008 Sep 16 10:29 AM

[HBWOW:]

Is bigger better and larger means stronger??? Ask AIG!!!
Why do we not hear anything about Countrywide's portfolio?

2008 Sep 16 07:20 PM