MoneyMiser Picks

It will be interesting to watch a key technical on multiple bank stocks for Monday.

Morgan Stanley and JP Morgan both closed Friday on, or very near, their 50 day moving average.

The break above the 50 MA has been widely cited on CNBC, as well as the web as a sign that the financial stocks were going to rally.

Monday will prove the first key technical test, to see if they bounce off or break down.

Given trends in two other technical indicators, my guess is they will break down. Both the MACD (8,17,9) and the Slow Stoch (14,5) in MS & JPM have started to trend negative. In MS's case, the MACD divergence has already crossed below 0 to the negative, and the Slow Stoch has crossed below 80. In JPM's case, the MACD divergence declined the past two sessions, and the Slow Stoch has already crossed over it's signal line, and will probably break below 80 on Monday.

Looking at a broader measure of financial stocks, the XLF could not sustain its break above its 50 day MA. The ETF closed below the 50MA this past Thursday, and followed with another down day on Friday.

From a technical perspective, the XLF is like JPM in that its MACD declined the past two session, and like MS in that its Slow Stoch has alread crossed below 80.

All three made huge moves last week, and already retraced some from that. So let's factor the price movement in as well. A 50% retracement from the high of each moves gives us approximately:

JPM - $21 (close Friday at $23.15)
MS - $21 (close Friday at $20.24)
XLF - $7.80 (close Friday at $8.14)

So what does this suggest going forward? Given the overall sentiment about how "strong" of a company MS is, the break below a 50% retracement signals one of two likely scenarios:

(1) Not all may be well still in bank stock land, and this bear market rally in the financials may already be over

OR

(2) Perhaps traders "overdid" the selling/profit-taking on MS, and that's your best opportunity for the bear market rally going forward.

I'm not experienced enough to say "with any authority," which is the more likely scenario. So like a lot of other traders, I'll make a guess.

Personally, I don't believe in the rally from a fundamental standpoint. I agree with Jeff Macke that we cannot accurately value how the banks are making money, despite assurances of Citi, BofA,a nd JPM this past week about the "profitability" so far this year. Until we create an accounting system that anyone who balances a checkbook can understand, there will always be those who "financially engineer" their books to deceive shareholders, board members, regulators, and lawmakers for their own good.

From a technical trading perspective, the indicators show downward trends.

So based on my fundamental viewpoint and the technical indicators, my guess is we're heading lower in the financials again. I don't know how low however.

So given the negative outlook, where's the best place to make money? Given the three above symbols, I'm more likely to be interested in an April put options spread on JPM. Shorting the stock outright is too dangerous imho, given the volatility in the financials. Being able to define your risk accurately is important in volatile times.

So I'd recommend buying the $23 put option, and selling the $18 put option. At Friday's close, you' be paying about $1.77 for this, with a maximum profit opportunity of $3.23. Not quite 2 to 1, but pretty close. Also, let's say JPM stalls out at its 50% retracement level. This spread eeks out a tiny bit of profit per spread contract. If you can afford enough of them, that tiny bit of profit offers a real return on investment (before fees and taxes) of just under 13%.

Comments: View Comments |  Sunday March 22, 2009