The Bank of New York Mellon Corp. Draws Mixed Analyst Attention

              

The Bank of New York Mellon Corporation (BK: sentiment, chart, options) drew attention from the brokerage community this morning. Analysts at Keefe Bruyette downgraded the shares from "outperform" to "market perform, while Citigroup started coverage on the security with a "buy" rating and a $33 per share price target. Keefe Bruyette's downgrade appears to have garnered more favor with investors, as BK shares were off more than 2% in early trading.

Checking in with the rest of the brokerage bunch, analysts have doled out 7 "buy" ratings, 4 "holds," and no "sells," according to Zacks.com. The stock's average 12-month price target rests at $38.53 per share, per Thomson Financial, representing a premium of more than 37% to the stock's Wednesday close at $28. This bullish configuration leaves BK vulnerable to additional downgrades or price-target cuts.

While the analyst activity brought me to the banking concern, the stock's technical configuration held my attention. Since late September, BK has maintained a series of lower highs and higher lows, creating a triangle pattern. Specifically, this activity resembles a technical formation called a symmetrical triangle.

A symmetrical triangle is most often associated with a continuation pattern, though there are occasions when this technical formation will mark an important trend reversal. As such, the stock's ultimate direction can only be determined by a valid breakout, which is denoted by a close outside the ascending and descending trendlines.

BK's series of lower highs and higher lows fulfills part of the pattern requirements, as does the stock's dwindling trading volume. Furthermore, the shares are locked in a long-term downtrend, signaling that a standard resolution to this formation should send BK sharply lower.

There are 2 methods to determining the extent of the move following a valid breakout. The first method involves measuring the widest distance of the symmetrical triangle and applying it to the breakout point. The second method involves drawing a line parallel to the pattern's trendline that slopes in the direction of the breakout.

Using the first method, the widest distance in the symmetrical triangle is approximately 17.5 points. This implies that a bearish resolution to this technical pattern could place the shares well below the 20 level, while a bullish resolution could push BK upwards of $45 per share. Using the second method reveals similar results, as demonstrated by the red trendline in the chart below.

What You Need to Know

Traders looking to add symmetrical triangle formations to their trading repertoire should remember a few key points when dealing with these patterns:

1. A symmetrical triangle is most often an indication of a continuation pattern. As such, the stock must be in a trend with a duration of at least 2 months to confirm the pattern.

2. As the symmetrical triangle pattern develops, trading volume should wane. Falling volume is typical of many technical patterns that result in a sharp breakout move, and is seen as a "quiet before the storm."

3. The typical duration of a symmetrical triangle pattern is about 3 months. Anything less than 3 months is generally considered a "pennant" formation.

4. Finally, for the breakout to be valid, it should be on a closing basis. Some traders will use a 3% break or a time frame to confirm validity. Also, keep in mind that the resolution of the formation will not always be a continuation, so confirmation of the trend break is crucial to trading a symmetrical triangle formation.

Sentiment Points Toward a Bearish Resolution

Applying a contrarian perspective to BK's technical backdrop, it would appear that the shares are poised for a continuation of their downtrend. On the options front, the stock's Schaeffer's put/call open interest ratio (SOIR) of 0.72 means that calls outnumber puts among options with less than 3 months until expiration. This ratio also ranks below 81% of all those taken during the past year, underscoring the investor optimism levied against this underperforming stock.

Elsewhere, short interest accounts for a paltry 0.77% of BK's total float. However, short sellers have been frantically adding to their positions on the security, as the number of BK shares sold short surged by more than 52% during the most recent reporting period. Should this trend continue, the added selling pressure could force the shares steadily lower.

In conclusion, bullish sentiment toward an underperforming equity is rarely a good sign from a contrarian perspective. BK is being touted by Wall Street analysts and options traders, while short sellers have upped their pressure on the security. Combine this sentiment backdrop with the dire implications of the stock's symmetrical triangle formation, and BK appears destined to continue its long-term decline.

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