With a solid earnings season for big banks like JPMorgan Chase & Co. (JPM), a bank-friendly Fed indicating the third hike of the year, and an October taper, bank stocks have taken off in September and October.
JPMorgan Chase is up 11% since September 1st, and it looks to rally further.
JPM data by YCharts
Surging Treasury yields are adding to the bullish momentum for JPM with both the short-term yields moving higher (with the Dec. Fed hike expected) and the 10-year yield surging on improving economic fundamentals, a Fed taper, and possible tax reform.
Remember last quarter when Dimon warned of a lack of volatility in short-term securities hurting trading revenue? Apparently, the market gods got the message and gave bank investors an early holiday gift in the form of a 19% move in the 2-year yield, coupled with a 13% move higher in the 10-year yield. With these rapid advances, Q3 seems like a lifetime ago.
2 Year Treasury Rate data by YCharts
In my last article, JPMorgan Is Setting Up For A Move Higher, we looked at the charts and the probability of another move higher.
In this article, we’ll look at what needs to happen for JPM to continue its run. With momentum surging, it’s likely that JPM should move higher, but overbought signals are flashing, reflecting the rapidity of the current move.
Chart from my August article:
- Here’s the momentum from August, at the bottom of the chart whereby MACD hadn’t turned higher yet (blue circle).
- Why was momentum so low? Most of the market (and me too) didn’t believe the Fed would hike for a third time this year. However, during the last Fed meeting, Yellen indicated a hike was likely, and yields took off.
- However, I also highlighted that the fundamentals drive price action on the charts, not the other way around. Upon a break of $94.80, $98 to $100 is doable. And, the fundamentals won out in September.
JPM demonstrates the power of range breaks: With the orders above the $98 consolidation area, JPM shot higher upon breaching the price level. The $98 break triggered buy positions from the longs while simultaneously buy orders from short sellers who unwound their short positions. In short, we had both bullish and bearish traders buying JPM above $98 exacerbating the move higher.
Current Bullish Channel for JPMorgan:
- JPM has been riding high in the bullish channel (purple lines). A channel is two lines connecting the highs and lows of a rally. The key factor in creating the channel is that both lines must be identical. I took the bottom line after matching against the lows, cloned it, and moved cloned line to the tops of the price action. As you can see, it fits quite nicely and, in my opinion, indicates that traders are using these lines for entry and exit points.
- Currently, price is pushing up against the top of the channel, circled in white and given the late day selloff, we might see a pullback in the short term. The candle has a wick as sellers sold off expecting JPM to top out.
- Regardless of any pullback, in my opinion, there’s still juice left in the tank for another push higher. And, the following charts show why.
If you don’t follow momentum indicators, don’t fret about the chart below because I’ll boil it down to one statement. There’s a lot going on, and it’s all bullish.
- MACD measures momentum. We see the short-term moving average crossing the long-term moving average (1st yellow circle). This is called a bullish crossover.
- Also on MACD, we see a higher high (white arrows) as the moving average lines broke the previous high (2nd yellow circle).
- Just as we want to see price make higher highs, so too, do we want momentum to make higher highs because it signals liquidity is behind the move. In other words, the big boys or hedge funds are behind JPM’s move higher.
- RSI (above chart) is coming up against the most bullish reading since July (white circles).
- The green trend line shows that RSI’s momentum has yet to break the trend line to the downside. This is a very bullish signal. In my experience, it usually takes a couple of breaks lower in RSI (below the green line) to suck the momentum out of a rally. For JPM to go into correction, RSI would need to break below 50 (yellow line).
- The two momentum indicators show me that JPM still has another move to the upside. MACD recently made a higher high, and RSI has yet to break its upward sloping trend line. However, given the overbought signal on RSI where it’s currently at a 76 reading, I would expect a pullback, but with all the momentum, I believe JPM will rebound for a new high before the December Fed meeting.
How JPMorgan can go higher:
If you follow my articles on SeekingAlpha.com, you know that I believe the fundamentals drive stocks, but the charts show the path or course of direction. Traders place buy and sell orders around trend lines to either go long or short or to trigger stop-loss orders or take-profit orders. When these orders are triggered, the move is exacerbated in the direction of the break and can result in huge momentum moves.
Levels To Watch:
On the chart below, we can see some of the key levels in price or where traders may have buy and sell orders placed for JPM.
- The key Fibonacci levels are highlighted to show where JPM might hit resistance or break out during another move higher. The Fibonacci levels are percentages representing extensions of the October rally and where buy and sell orders might be located.
- On a break above $102.50 and a daily close should create buying interest. From the chart below, the green box shows the wick from the 10/26 daily candle. The wick represents sellers unwinding at the end of the day, which is a short-term bearish signal. For JPM to push higher, we want to see a green-daily candle in the coming days to “fill in” the wick or surpass it.
- On a break above $103.60 (127% Fib), $104 to $105 comes into play as the market might try for the 144% Fib extension level of the October rally.
- On a bullish break of $104.70 (yellow line), there’s likely to be buy orders in that area, and the stock may surge to $107 and eventually to $110. In my opinion, these levels are medium to long-term targets.
- On any of the bullish breaks outlined here, look for resistance in the form of take-profit orders at or around the circles (blue, yellow, and purple). It’s at these levels where JPM has a confluence of resistance with the channel top (purple line) intersecting the Fibonacci levels.
- On a bearish break of $98.50, there are likely to be a number of sell orders in this zone. The sell orders, if triggered will likely exacerbate the move lower and possibly push the stock to $97 and a break of $97 could push JPM back to $95.
- Again, any break higher must have fundamentals behind it, and these fundamentals include economic, JPM’s financial performance, and rising Treasury yields.
If you don’t follow the indicators outlined in this article, that’s ok, but please bear in mind, many traders do. As a result, buy and sell orders might be located at these locations.
- With year-end around the corner, traders may unwind some of their positions at the key levels mentioned earlier as investors look to take profits before the holidays and the December Fed meeting.
- As a result, I believe there’s a short-term risk of JPM selling going into or perhaps after the Fed meeting. The lack of liquidity in December and the volatility risks from the Fed meeting might tempt investors to watch from the sidelines. However, I would look for investors to re-enter JPM in Q1 of 2018 assuming the bank-friendly fundamentals go according to plan.
- Not to belabor the point above, but the rapidity of JPM’s move higher is also a factor in year-end selling. If JPM hits $110 before the Fed meeting, it’s likely we’ll see selling afterwards in my opinion, since $110 has been a long-term target for many analysts and investors.
- In my opinion, unless there’s a material change in the economic fundamentals, the market is poised to move JPM to $103 to $105 in the short term. I believe the $108 to $110 levels are a 2018 event.
- The upcoming fundamental events include economic data and the Fed taper in October as well as the expected hike in December. Ideally, we want to see continued volatility in the 2-year yield which helps boost trading revenue. Also, a rising 10-year yield should drive the performance of the bank’s assets by widening spreads for credit products and pushing net interest income higher for Q4.
- In the coming days, I’ll have more analysis on JPM’s Q3 performance and what that means for 2018. Please become an “email alert” follower (see below) to have the article emailed to you.
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Good luck out there.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.