Browse Symbol Stacks: JPM: JPM’s Death Cross: Uncertain Earnings Season for the Banks

July 11, 2012 7:00 am EDT

By Abigail F. Doolittle

This is a rather dramatic Death Cross considering that JPM’s 50 DMA has made a perfect vertical swan dive through its 200 DMA even though the shorter moving average was moving vertical in the other direction just two months agoBeyond the speed and striking look of this technical aspect, it is worth noting for a few reasons and those include the results of JPM’s last two summertime déjà vu Death Crosses, what this may suggest about JPM’s upcoming Q2 report on Friday and the possible implications for the kickoff of Q2 earnings season for the financials.

First, JPM’s last two Death Crosses produced bouts of very volatile sideways trading at best between about $30 and $38 for weeks until investors gain enough bullish or bearish information to break that directionless yoyo one way or the other while its fulfilling Rising Wedge suggests a near-term at worst near $28.

Second, it is the almost overnight appearance of JPM’s Death Cross that makes it less useful as a tell of what’s to come in JPM’s upcoming Q2 report, but when thought about in the context of the Breakaway Gap and the bearish Symmetrical Triangle presenting in the monthly chart below, a message about JPM’s upcoming quarterly report emerges.

The technical message given by JPM’s Death Cross and bearish Symmetrical Triangle in the setting of a bearish Flat-Topped Broadening Top is that there is unlikely to be any upside catalysts to come from JPM’s Q2 report while there is lots of room for uncertainty and even downside catalysts.

Interestingly, though, the Symmetrical Triangle speaks more to the uncertainty factor to come from the upcoming report – probably lots of holes and open statements about Q3 and Q4 and the grand total effect of its infamous trading disaster – than about outright negative news while those bearish fundamentals are more likely to present later in Q3 or in that earnings report.

Should this prove true about the Symmetrical Triangle’s bearish presentation, it confirms at $30.58 for a target of $24.44 and right at the bottom trendline of the Flat-Topped Broadening Top and a good reason to think the Symmetrical Triangle will break down rather than turn into a Double Bottom that confirms at$36.72 for a target of $42.86 and another shot at the top of the multi-year and bearish technical aspect at play.

Third, when JPM’s Death Cross is connected to the kick-off of the Q2 earnings season for the banks, its message is not necessarily one of outright and immediate bearishness to come for the financials but more of a warning of that bearishness to come later in the year as negative information about JPM and other big banks replaces what is likely to be another month to three months of high level uncertainty.

Such uncertainty will probably include questions around the effects of Dodd-Frank on the profitability of the financials and the ability of the banks to act as banks, the fall-out from the LIBOR scandal and how far and deep it might go, the possibility of other monster-sized trading losses at some of the other large financial institutions and, lastly, a sympathy trade to the obvious uncertainty surrounding the European financial system.

All of this means that there is little to no upside to the financials in the near-term while the potential for big downside by the end of the year is huge, and thus there is probably little reason to be involved with the financials from the long-side during the likely weeks of sideways trading to come after this year’s summer reporting season.

In turn, JPM’s Death Cross appears to be signaling sideways and then down for the banks after what is likely to be an earnings season fraught with uncertainty.

As always, thank you for taking the time to catch up on my thinking.