The financial sector of the S&P 500 on Tuesday was the weakest performer. Although the damage was contained, the price action in shares of JPMorgan Chase & Co. (NYSE:JPM) caught my attention early in the day. The weak performance in JPM stock was particularly troubling considering the timing and location on the chart.
For the near-term, a mean-reversion move lower looks to be very much in the cards.
While the rally posted a new high just last Friday, upside momentum had been waning since mid-December.
While I do think bank stocks can rise further, the rate of change of the November/December rally is unsustainable.
The price action in JPM stock on Tuesday looks like the beginning of a pause.
Last Friday, JPMorgan reported fourth-quarter and full-year earnings, which included record revenues, driven by all-time best revs from the markets business. Although traders initially welcomed the news with a rally, by Friday’s end, the reaction was muted at best.
JPM Stock Charts
On the multiyear weekly chart, we see that despite a few notable bumps along the way, the rally in JPMorgan shares since 2011 has largely taken place in a defined up-trending channel. The 200-week simple moving average (red) has been acting as important support since 2012.
In 2015 and 2016, the MA also helped confirm the lower end of the channel, which I marked with two purple-dotted parallels.
However, note that the sharp post-election rally in November started breaking JPM shares out of the channel to the upside. Through the lens of technical analysis, this most often leads to at least a pause if not an outright corrective move back lower to work off excessive buying.
JPM stock also remains s vastly extended above its longer-term moving averages. This is signified by the record overbought readings of the MACD indicator at the bottom of the chart.
On the daily chart, we see that last Friday following the earnings report, JPM stock attempted to rally and break higher out of a multiweek consolidation phase. But the intraday rally ultimately failed, and the stock closed well off its intraday highs. This was followed on Tuesday by a gap-down at the open, leading JPMorgan to close at its very lows of the day.
This failed post-earnings rally is concerning and argues for further potential selling pressure in coming days/weeks.
How far could JPM stock fall from here?
Using simple Fibonacci analysis, one would argue that the next support area for JPM stock is around the $79-$81 area. This matches up with a 38.20% to 50% retracement of the entire post-election rally (the “Trump Bump”). I think this would simply be a healthy breather for the stock, and would work off the near-term overbought readings.
Traders who are quick on their feet could consider playing JPM to the short side for a few points toward the aforementioned next possible area of support. All the while, I would look out for a next strong bullish reversal upon which you could probably buy shares again.
– Serge Berger
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Source: Investor Place