New Short Set-up in JPMorgan (JPM)

03/28/2012 10:55 am EST


Donald Pendergast

Founder, Linear Trading Systems LLC

Cycle charts are in strong agreement that shares of JPMorgan Chase (JPM) have topped and are heading for a cycle low, writes Don Pendergast. This creates a potential short play or a chance to buy on the correction.

One thing about stocks from the banking industry group is certain: they can (and do) make marvelous trending moves on a regular basis, be it bullish or bearish. As such, they can be prime profit- opportunity centers for your trading portfolio.

The common shares of JPMorgan Chase (JPM), one of the US’ largest banking establishments, may soon be offering nimble traders a shot at a new shorting opportunity, and patient traders/investors may get another chance to get onboard during next month’s anticipated cycle low.

Here’s a closer look now:

Click to Enlarge

Price cycle analysis reveals that a number of cycles are at work in the everyday price action in JPM. Currently, cycle lows of 3.7, 7.3, 14.3, 28, and 54 days have been identified, along with several other large-scale cycles.

If you look at the daily price chart of JPM, you can easily discern that the 28- and 54-day cycles have already peaked and are starting to turn sharply lower, and that the 17-week cycle may soon be peaking. In addition, the 34-week cycle has already peaked and is moving lower.

Cycle analysis is not always a precise market science (and neither is any other method, be it Elliott Wave, Gann, or Fibonacci, or any other), but when the majority of the main identified cycles are all in general agreement that a significant swing high in the price of a stock has been made, it’s usually wise to pay close attention.

On the chart, we also see the general time/price confluence zone where JPM may be expected to find cycle low support in the lower $40 range, perhaps by the early part of April 2012. Note that the valid trend line (VTL) that connects the 28-day cycle lows also is projected to offer price support at the lower range of the green time/price support zone.

Glancing at the lower-right portion of the chart, we also find that there are a good many anticipated cycle lows all converging in the May/June 2012 time window (blue shaded area), something else to be aware of if you regularly trade JPM.

With three of the cycles shown already falling and another one projected to peak soon, existing long positions in JPM might do well to either begin scaling out of and/or more closely protecting their existing long positions. Early- to mid-April 2012 may offer another chance to get on another up leg.

As for other non-cyclical evidence that may help support the idea that JPM actually did peak on March 21, 2012, take a look at this daily chart, which shows the bearish price/money flow divergence in JPM:

Click to Enlarge

With money flow failing to keep up with JPM’s recent rise, yet another clue as to the most probable near-term direction of JPM may be seen here.

The 34-period Chaikin money flow histogram (CMF)(34) had clearly parted ways with JPM’s most recent uptrend, failing to make a new high along with JPM’s share price. Overall, the cyclical and money-flow picture does seem to put the odds in favor of JPM pulling back into the lower $40s within the next two weeks, so if you are already long this stock, you may wish to start scaling out of your position and/or begin running a closer trailing stop.

By the way, both the .SPX and .RUT each feature falling 40-day price cycles that also generally coincide with the cycle analysis depicted here for JPM. If such an early-April cycle low holds, the quality of any rally higher will mainly depend on the quality of the earnings reports in April.

It should be an interesting time in the broad markets, especially if earnings are much better—or worse—than expected.

By Don Pendergast, independent trader and systems writer

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