BAC - Bank of America

I am watching BAC for a possible short here for a few reasons.

First, it has broken the uptrend line that goes back to early November.  There is nothing mysterious about a trend-line break.  In this case all it means is that prices were rising until about two weeks ago.  Since then they have stopped rising and have held around the $23 level.  A correctly drawn trend-line is a graphical illustration of this.

Second, over the past two weeks there has been a lot of supply of the stock around the $23 level.  On Friday it looked like the forces of demand were going to overpower the forces of supply and that the stock would finally break through the $23 level but by the end of the day it was clear that the forces of supply were in control and it closed at the day's lows.

Third, it has formed a 'reversal pattern' that is known as a 'bearish engulfing line'.  This is because the action on Thursday was kind of was up just a little bit.  But on Friday, it opened at a higher price than it closed at on Thursday, and then it closed at a price that was lower than Thursdays low.  These dynamics could mean that the buy interest is drying up and the stock could head lower.

Fourth, it is up almost +40% since early November.  Anytime a stock moves that much in such a short timeframe there is a good chance that there will be some profit taking.

Fifth, there is a clear stop out level at $23.

So if BAC starts to trend lower, a possible short strategy would be to sell it short at $22 with a target of $20 and an initial stop-out at $23 followed by an adjusted trailing stop if it heads lower.  You may ask 'why would I short it at a lower price than it is currently trading?'  The answer is that if it gets down to $22 it means that it is trending lower.