JPMorgan Chase Stock Testing 2018 Resistance

Capital has flowed into commercial banks and the financial sector since the start of September, lifting Dow component JPMorgan Chase & Co. (JPM) within three points of 2018's all-time high above $119. If this uptick can close the distance, it will mark the third test at this stubborn resistance level so far in 2019. A breakout would be significant, establishing a measured move target near $150 that resurrects the commercial bank's long-held reputation as a market leader.

However, there are reasons to be skeptical as we head for the fourth quarter. For starters, accumulation-distribution readings have slumped to two-year lows in 2019, and two weeks of buying pressure have done little to fix the bearish volume measurements. Of course, stocks can gain ground out with insufficient sponsorship, but the uptick will set of a major bearish divergence, raising the odds for a failed breakout that traps enthusiastic bulls.

In addition, slumping yields are bad for profits because they compress overnight spreads that banks need to make money. Although yields are ticking higher once again, they are unlikely to gain much ground with President Trump now calling for negative interest rates. And most importantly, commercial banks need corporate investment to grow profits, but U.S. companies have chosen to buy back stocks with surplus capital in recent years rather than to invest in their businesses.

JPM Long-Term Chart (1990 – 2019)

A four-year downtrend ended at a split-adjusted $3.21 in 1990, giving way to a powerful trend advance that unfolded through an Elliott five-wave rally set into the March 2000 high at $67.20. That marked the highest high for the next 15 years, ahead of a bear market decline that found support in the mid-teens in October 2002. The stock posted respectable gains during the mid-decade bull market, gaining ground in two rally waves that stalled near the .786 Fibonacci sell-off retracement level in 2007.

Aggressive sellers took control when the derivatives and real estate bubbles burst in 2008, generating a steep decline that ended 30 cents below the 2002 low in March 2009. That print signaled the end of the nine-year downtrend, generating a strong recovery wave that stalled in the mid-$40s in 2010. A 2013 breakout cleared that resistance level and completed a round trip into the 2000 high in the summer of 2015, when the rally stalled once again.

The stock broke out after the 2016 presidential election, entering a fruitful period that posted solid upside into the February 2018's all-time high at $119.33. The subsequent trading range broke support in the fourth quarter, with the sell-off reaching a 15-month low at year end, while the bounce into September 2019 has run into a wall of resistance near $117. It's trading near that level once again, marking the third attempt to reach resistance at the 2018 high. The monthly stochastics oscillator entered a buy cycle in July 2018 and is just now reaching the overbought level, predicting continued strength. 

JPM Short-Term Chart (2015 – 2019)

The on-balance volume (OBV) accumulation-distribution indicator posted a seven-year high at the 2018 price peak and rolled into an aggressive distribution phase that signaled the departure of institutional capital. OBV posted a two-year low in December and turned higher, but buying pressure into September 2019 has been exceptionally weak and is just now reaching the .382 Fibonacci retracement while price action has nearly completed a 100% retracement.

This conflict signals a strongly bearish divergence, warning that the stock doesn't have the sponsorship needed for a sustained breakout. It also indicates that the funds and institutions are still sitting on their hands, with the current uptick driven by retail buying interests. This group cannot sustain a breakout without institutions, but it can provide the firepower needed for aggressive sellers to reload positions as soon as the stock probes a new high.

The Bottom Line

JPMorgan Chase stock is trading just three points from 2018's all-time high, but adverse technicals under the surface lower the odds that it will break out and head higher in the fourth quarter.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.