Following an earnings report that beat on both the top and bottom line, shares of JPMorgan Chase & Co.(NYSE:JPM) once again encountered trouble at the $69 price level.
JPM stock traded as high as $69.03 intraday on Friday before selling off to close lower and near the lows of the day at $67.52. I expect JPMorgan to continue to have difficulties moving higher over the near term.
While both earnings ($1.58 versus expectations of $1.39) and revenues ($25.51 billion versus $24 billion consensus) handily beat estimates, both of these measures were well below comparables from a year ago. Fixed-income trading was a key component, up nearly 50%. JPMorgan stock analyst David George of Baird feels that impressive growth in FI trading will be unlikely to last.
JPM is also trading near the highest price-to-earnings ratio over the past year at 11.44. This comparatively elevated P/E ratio previously marked a significant top in JPM stock last November.
The technical picture is somewhat bearish, with JPM running into major resistance at the $69 level.
JPMorgan stock previously failed to hold this key level in both July and November of last year.
Click to Enlarge Friday’s inability to move convincingly through the $69 area following the earnings beat further reinforces the notion that a top is in place.
A deeper drill down of Friday’s price action is also emblematic of a top. JPM stock opened higher at $68.80, briefly traded up to $69.03, then succumbed to selling pressure to close both lower and near the lows of the day at $67.52. This type of key reversal day is many times a reliable indication of a top in the stock, as buyers have become exhausted and sellers have taken control. It is even more significant when good news, such as the earnings report for JPMorgan stock, fails to take shares higher.
Click to Enlarge To position for a period of consolidation in JPM, a short call spread strategy makes sense.
JPM Stock Trade Idea
Buy Nov $72.50 calls and sell Nov $70 calls for a 43-cent net credit.
These are the regular monthly options that expire Nov. 18.
Maximum gain on the trade is $43 per spread and maximum risk is $207 per spread. Return on risk is 21%. The short strike is positioned above the $69 resistance level.
I would look to close out the spread on a meaningful move past the all-time high of $70.08 while hoping to have the spread expire worthless and keep the initial credit if JPM stock remains well-behaved.
As of this writing, Tim Biggam did not hold a position in any of the aforementioned securities. Anyone interested in finding out more about option-based strategies or for a free trial of the Delta Desk Research Report can email Tim at tbiggam@deltaderivatives.com.
