Let's Exploit this Opportunity on JP Morgan Chase Stock.

We would like to exploit a new opportunity among the baking sector stocks in the upoming earnings week. With a potential risk to reward, we think this is a high probability trade that is bound to manifest itself in the upcoming trading sessions.

Date: Sep 24, 2024

Market Focus: Equities & Options

Time Horizon: 7-day swing

Distribution Time: Post-Market

Market Overview

• Global Sentiment: After the recent Fed rate cut last week, which was more or less priced in by the stock markets in the US, now the sentiment shifted more to a cautionary approach having the market stagnant throughout the day. VIX remained stable and the market looks for further cues on upcoming rate cuts. Fed officials have indicated for more room for larger rate cuts signaling a frenzy of among rates traders. IMF has warned of economic collapse in 2025 and a potential hard landing for the US if they don't start to cut faster to achieve their targets by EoY. Fed dot plot already gave us where we might be for the upcoming quarters, and investors are cheering the soft landing situation. Fed's Goolsbee from Chicago expresses more cuts for 2025. This leaves a void for the magnitude of the cut we may see before Christmas ending Q4 2024. We also are closely monitoring the middle east tensions where Israel just wiped out 500 Hezbollah militants in Lebanon. Unless, there's a major escalation, which we don't see happening in the near term from other countries joining the war, we don't see an effect from oil either as OPEC is heavily trying to put the price under control after increasing their stockpiles with increased production.

• Key Economic Data: Nothing major other than consumer spending data after the market opens, which signals the strength of the economy in the US.

• Current Market Condition: Consumer confidence took a sharp dive this month, marking the largest decline in three years. The Conference Board's Consumer Confidence Index plummeted nearly 7 points to 98.7 in September, primarily due to growing pessimism about the current and future economy, particularly concerning employment prospects. Despite a relatively healthy labor market, concerns about job availability intensified, with fewer consumers perceiving jobs as plentiful and more finding them hard to come by. Inflation worries persist, though some consumers noted a slight decrease in inflation levels. Notably, election concerns have not reached the levels seen in previous election years. With the recent rate cut announcements, the liquidity is pouring out of money market funds into stock markets in anticipation of greater returns. As you know, with the lower interest rates, the yield is very much low or negligible - therefore making investors put their funds into stock markets that could produce high returns. The flow of money into and out of exchange-traded funds on Wall Street reveals a shift away from money-market funds due to low returns post-Fed rate cut. Investors now seek stable long-term yields, leading to a surge in dividend-focused stock funds and riskier assets like cryptocurrency. Equity funds saw a significant inflow, driven by market highs and stock buybacks. This trend reflects a move towards reliable returns and investor confidence in speculative assets. Although the good news from FOMC is priced in, there's still more to come going into the November elections. Banking sector has reacted positively to the move and we say that because the interest rate cuts have already priced in the stocks if you see the charts. With this, let us now look at the stock of JP Morgan Chase and see why it is in the right position for a decent move upwards. Note: Currently, the market is in accumulation mode and is producing sideways price action perfect for neutral strategies. We exploited this in the last couple of days through some neutral strateies in options that made us $1800 and $4000 repectively in the last 2 trading sessions. Check our performance page & sign up for Pro-Guidance group for FREE 10 day access where you can get such trades every day.

Technical Analysis

• Major Support/Resistance Levels for Stock JP Morgan Chase & CO:

• Support: 210, 205, 203

• Resistance: 214, 216, 222

• Indicators:

• MACD (Moving Average Convergence Divergence) signals buy

• Slight (weak) bullish divergence on daily chart between the price and MACD already manifested a few days ago from 203 level and will continue forward into the upcoming earnings unless a conflict occurs later

• Fibonacci extension levels are drawn to point out key levels for exit

• Volume Profile - good and will rise in the next days into earnings week - gains momentum

• Has strong support on daily & weekly time frame with long-standing previous resistance zone of 205-203 now acting as a support where the stock has bounced upon

• No other conflicts on lower and higher time frames.

Chart

Trade Rationale

Choose either equities or derivatives, not both.

Equities

• Asset/Instrument: JP Morgan Chase & Co. [Stock]

• Ticker: JPM

• Trade Type: Long

• Entry Point: 211

• Exit Target: 216,

• Stop-Loss: 143

• Position Sizing: 5% of the portfolio (don't risk more)

Derivatives

Asset class: Options

Trade Type: Bull Call Spread

Buy JPM Dec20 215 Call for a debit

Sell JPM Dec20 225 Call for a credit

Net debit paid $387/ contract

Probability 38%

Return/Risk 1.5

Max Profit ~$600

Margin/max loss $387

Time left 87 days

The behavior of bull call spread is similar to buying a simple call option, but at a reduced cost. The advantage is that the cost is limited when buying longer expiry options such as December. We do so because we want to protect ourselves against theta decay that acts against option buyers - meaning options lose their value as the expiry approaches and becomes 0 depending upon the underlying price if it ends at or out-of-the-money. The good thing about debit spreads like bull call spread where you pay to open the position, is that as earnings approaches the interest in the stock rises in the stock market and with that, implied volatility (IV) rises in the option chain for a particular expiry. It is even more effective for the near term series in October for earnings in October, but still has effect on December Options chain where we bought our spreads in. We want to maximize the profit potential and exit just before earnings date with increased IV, meaning rise in options prices contributed additional from its rise seeing the chart above and the technicals discussed. We have a decent bullish divergence and a buy signal on MACD with the moving averages stacking up all along a recent resistance now acting as a support for the stock without any major conflicts. We intend to capitalize on this one. Let us see how it goes.

The upcoming dividend announcement on October 4th and earnings a week later are key for this upward move.

Strategy

• Catalysts: Earnings on October 11th & dividend announcement on October 04th, for Q3 performance benefits.

• Risk Factors: None.

• Correlation: Not applicable.

• Portfolio Exposure: This trade adds a positive exposure to the banking sector weightage and is a net bullish position for the overall portfolio exposure at the time of writing this brief.

• Maximum Risk: 1-5% of the total portfolio capital. No deviation!

• Hedging Strategy (if applicable): We already sold higher strike leg in bull call spread to mitigate costs, although this is minimal.
  

Economic Events

08:30 AM EST: US GDP numbers and Federal Reserve Chairman speech.

• Impact: This may cause slight volatility in US equities ahead, but nothing major to worry about as already the stance of Fed is priced in, except if the GDP is too distorted Quarter-on-Quarter.

Summary

We intend to exploit this bullish move and may exit on demand as usual, at which point in time, you will receive an email alert for the trade closed or adjusted.

Closing Notes

This trade is valid only as long as the price doesn't move 3% - typically for a day or two. Don't consider the trade if the stock has moved beyond 170 or don't pay more than $450 for the option spread position.