Do you want to operate like the fat cats on Wall Street and generate more consistent profits? A good place to start is learning to make profits from going long some stocks and shorting others. A good place to begin in today’s market is with a pair trade of shorting JPMorgan Chase (NYSE:JPM) and going long Morgan Stanley (NYSE:MS). Charts indicate that shorting JPM stock and going long MS stock is a good strategy now.
It’s no secret that last month was not very pleasant for bullish investors in general But traders who were long financial stocks in general and JPM stock or MS stock in particular probably won’t feel sorry for those who invested in other sectors.
While S&P 500 stocks with stretched valuations took a hit of around 12% at their recent lows, the SPDR Financial ETF (NYSEARCA:XLF) and most of its big bank and financial stock components have been a sort of canary of bearishness since peaking in late January.
The chart overlay of the XLF and the SPDR S&P 500 ETF (NYSE:SPY) very clearly shows the divergent price action. The bottom line is that the financials have continued to lag the broader market in 2018, as the financials have racked up a year-to-date loss of a couple percent versus the S&P’s gains of over 5%.
Sectors like financials go through rotations. Furthermore, even within a bear market, there are both long and short opportunities for traders willing to listen to the price charts. Technicals indicate that a good long/short pair trade is emerging in JPM stock and MS stock.
Financial Stock Short: JPM Stock
Unlike most other financial stocks and big banks, under the stewardship of CEO Jamie Dimon shares of JPM stock have thrived. Compared with the financial sector, JP Morgan stock has followed the broader market much more closely and narrowly hit its most recent all-time high in September. However, that seemingly good news is bad news for bulls, in our view.
It’s our contention that JPM stock’s good days are numbered and its relative strength is bound to become its own worst enemy. As a result, JPM stock is poised to become a profitable short for traders.
Looking at the daily chart of JPMorgan stock below, we can see that JPM stock recently plunged below its 200-day simple moving average following a headline earnings beat that was tarnished by weak bond-trading revenues. Well, at least that’s the excuse the talking heads gave us for the decline of JPM stock.
More to the point, with JPM stock just barely clawing its way back above the long-term average and nearing its pre-earnings levels, I’m anticipating that the shares will soon undergo a pattern of lower highs backed by lots of overhead resistance. If I’m right, the next big move of JPM stock is straight down to a fresh recent low with a price target of $99 – $101.50.
The recommended strategy for shorting JPM stock is to wait for the shares to provide some modest confirmation by declining below their 200-day simple moving average. I’d suggest shorting at $110.25 with a stop-loss above the recent high of $113.25. This strategy allows for a potential payoff of roughly three times the total risk.
For more risk-conscience investors who are willing to jump in a little early on shorting JPM stock, the Dec $110 /$105 put spread looks good for up to a $1.35 premium with the added risk-reduction measure of exiting the short if the position loses 50% of its value.
Financial Stock Long: MS Stock
Shares of Morgan Stanley have been the Rodney Dangerfield of financial stocks and big banks. In other words, MS stock has simply gotten no respect for the past couple of years. During that time, MS stock has badly lagged the broader market and its financial peers. But those days appear to be numbered.
After reviewing MS stock’s monthly chart, I believe that Morgan Stanley stock is very well-positioned to rally higher. Over the past month, MS stock has successfully tested its prior downtrend resistance and the halfway point between its 2008 cycle low and its 2000 cycle high.
With the backing and filling of this financial stock also having formed a bullish hammer pattern and the monthly stochastics oversold; it’s nearly time to go long MS stock. For investors who want to wait for confirmation before going long MS stock, a move above $47.60 should be on their radar. That’s where October’s hammer high will be triggered.
To minimize risk, I’d recommend setting a stop below $44.50. While the hammer would still be intact, a decline of that magnitude would push the shares back through their angular support line and into the lower half of October’s hammer candlestick.
Buying the April $50 / $55 call spread for a premium of up to $1.15 and setting a 50% stop-loss is another approach that traders should consider.
As of this writing, investment accounts under Christopher Tyler’s management do not currently own positions in any securities mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional options-based strategies, related musings or to ask a question, you can find and follow Chris on Twitter at @Options_CAT and on StockTwits under the same name