MarketSpeak

JP Morgan has a history of bailing out the American economy. And it did so again in 2008. In concert with the Fed, they judiciously planned a way to prop up Wall Street as it disintegrated before everyone’s eyes. JP Morgan acquired Chase, as the Fed let Leehman fail and propped up Citi and others. This is one of the reasons I like JPM. It has a history of  doing the right thing at the right time. Yet, with such a worldwide system failure of the financial markets, even a JPM is not immune. Nonetheless, those that weather the storm get to live to see the sunshine again.

JPM has had an intersting 6 months and may be in a position to be one of the first to emerge from this financial chaos. Of course, may moving parts need to function properly again but I believe that the JPM piece is working just fine and it should reap the rewards as soon as the rest of the system starts to come together.
Let’s look at the numbers. Let’s go back to August 2008 and see how JPM has fared and attempt some interpretation of the future.

The trouble starts at the beginning of October  2008. JPM took the bulls by the horn and, in a deal with the Fed, agreed to buy one of the largest failing financial institutions on the Street. Nonetheless, the following months showed that even JPM cannot withstand a worldwide systemic breakdown.

Starting mid-November, this stock, as well as everyone else, goes into free-fall, losing half its value on moderate to high trading volume. At this point in time, looking at a doji chart could have led big investors to declare that the sky is falling and will continue to do so until the stock hits $0.

At slightly below $20, when RSI hit a record period low of approximately 18, we see additional indications of a low point. Price is below the Bollinger Band low threshold and the doji pattern indicates a narrowing of the trading range. At this time the Fast Stochastic indicator hints towards a turnaround signal at the 10th percentile. And, the next 3-4 weeks we see a rally.

Although the 200-day SMA shows a decline, it is not very useful in understanding the current turmoil. Yet, it nonetheless shows a decisive downtrend. However, by looking at the 10-day and 20-day SMAs, to this point in time, we see a clear indication of the bull and bear rallies. Although it was not useful in announcing JPM’s positive turnaround at approximately $18, it did reliably indicate the bear turnaround when it peaked at approximately $38. The Fast Stochastic indicator was most reliable overall. Combined with the RSI, Bollinger Bands and doji, we got a pretty clear sense of market inclinations.

But the big question still remains: what does this mean for the future? To mid-December 2008, one could have concluded that stability was returning to this stock, and if it is an indicator of the rest of its sector, maybe good news was on the horizon for financial stocks, generally.

Maybe it was a holiday season reprieve, maybe it was hope of change in Washington, DC, but not much happened until the first few trading days of the new year. Then, a near falling star doji is formed on the first day. The second day, a clear drop is recorded and, on the third day, a falling star doji has clearly formed. At this point, the Fast Stochastic indicator signals a bear market. This could have taken a few people by surprise because sales volume was relatively low since the third week of December 2008 and RSI was at the mid-point. Likely, disappointing wholesale and retail numbers as well as rising unemployment had investors second-guessing their commitments in the market.

Sales volume increased and investors held their breath for another plunge. In the second to third week of January, the Fast Stochastic indicator showed the possibility of a trend reversal to growth as RSI hit the 20th percentile, stock price dropped to approximately $12 and clearly broke the lower threshold of the Bollinger Band yet again. And this started the second large rally since September 2008.

Between mid-January 2009 and the present (end February 2009), we see that JPM’s price has varied in an increasingly narrow range with the 10-day and 20-day SMAs crossing more often and in shorter time intervals, albeit in an overall decreasing direction.
In addition, plotting a trendline between lows indicates a possible flattening. Interpretation: it’s getting harder to form new lows. Also, with the dollar gaining some strength against the Yen, we see one source of this pricing support.
Simultaneously, plotting a trendline between price highs shows a possible smoothing as well.

We need to keep a close eye on the first few trading days of the upcoming week to see how the market responds to a ‘dark’ doji that may be indicating a peak. However, looking at the Fast Stochastic indicator, which has been bullish for some time, we see that it is not even hinting at a peak/trend reversal signal. RSI is at 45 and has rarely grown past the 60th percentile in the last 6 months. Yet, a good part of February shows that JPM enjoyed an RSI well beyond the 55th percentile. Combined with a strengthening dollar, I get the feeling that market and macro-economic conditions are trying to combine to form a price bottom at or around $20.
Switching to a 3-month chart, the last doji that I see shows a top price of approximately $24. Breaking a $25 ceiling would indicate a credible attempt at a bullish trend reversal as long as the macro-economy cooperates.

We all need to keep a close eye on the news, early next week, and hope that the sentiment is high. If the economy holds for a week to 10 days, volume remains solid and a trading band of $24 to $28 can be maintained, we may indeed be seeing a trend reversal.

I like JPM because it has done everything right, acting quickly and decisively, very early in this market meltdown, in cooperation with the Fed, with government, and in the better interest of its investors. From what I’ve heard, its fundamentals are solid, relative to the current economic environment, and it will be completing its integration of Washington Mutual (a well-liked retail bank on the West Coast) by October 2009. It made smart acquisitions in these troubled times and became a coast-to-coast banker in the process.

Let’s hope that with Wall Street setting up shop on Main Street, entrepreneurs can see hope in the form of reasonable credit, very soon, so they can help alleviate a now 10.1% unemployment rate in some parts of the country (e.g. California).