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Bank stocks are on the move. The financial sector - as measured by the Financial Select Sector SPDR Fund (NYSEARCA: XLF ) - climbed to a new three-month high Monday. The who's who of the industry, from Goldman Sachs Group Inc (NYSE: GS ) to JPMorgan Chase & Co. (NYSE: JPM ) all participated in the bullish revelry. While the entire cohort looks admirable, though, JPM stock is in the spotlight for today's commentary.
Let's begin with an updated look at the sector.
The tell for XLF was the early June breakout that carried it back above the 50-day and 20-day moving averages, as well as the descending trendline that had defined its behavior for most of the year.
Traders seeking confirmation for breakout patterns often look to the volume indicator for clues. High volume always accompanies the best breakouts. These so-called accumulation days signal that institutions are entering the fray and increase the likelihood that the breakout sticks.
In this instance, XLF didn't disappoint. The sector scored six accumulation days in a row providing compelling evidence that its ceiling breach was the real deal.
And it's not just its absolute performance that's making a comeback, on a relative basis financials are starting to outperform the S&P 500 . Notice how the Comparative Relative Strength indicator (CRS) is now trending higher. Click to Enlarge
What Does JPMorgan's Chart Say?
The weekly chart of JPM stock shows just how much the stock gave back during its multimonth pullback. Click to Enlarge
In Fibonacci lore, the typical stock retraces 1/3 to 2/3 before resuming its trend. The average pullback then usually falls within 38.2% to 61.8% of the prior advance. The Fibonacci retracement tool can be used to identify these levels.
If you look at this year's retreat relative to the entire post-election ramp in the stock, JPMorgan Chase retraced between 38.2% and 50%. Viewed from that perspective, we can conclude that its pullback was normal, healthy and well within historical norms.
With the stock now having broken above its descending channel, its next ascent is well on its way.
A survey of JPM's daily chart reveals two things of note. Click to Enlarge
First, the stock suffered a break of critical support ($83) in late May that quickly morphed into a bear trap. Traders also refer to this pattern as a false breakdown or fakeout. Any and all bears who shorted the break were quickly dealt losses when JPM stock launched right back above support. This failed setup arguably aided the stock's recent rise.
The other action of note is JPMorgan's ability to hold this month's upside break. The 50-day moving average and descending trendline both reversed from resistance to support this week. Provided JPM can remain above the 50-day (Friday's low, essentially), the path of least resistance is undoubtedly higher.
When JPM Stock Calls, Pick Up
From an implied volatility standpoint, financials are the anti-tech. While traders currently view the risk in tech stocks as sky high, the expectation for volatility in XLF is virtually nil.
That's translating into cheap JPM options. With an implied volatility rank of 8%, the bank's options are about as cheap as they've been all year.
If you think the nascent uptrend can continue, then buy the Aug $85 calls for $4.15 or better . The maximum potential loss is limited to the initial cost of $4.15. To incur the entire loss, however, you'd have to ride the position all the way to expiration and have JPM stock sitting below $85. But there's no need to give this pup such a loose leash. I suggest bailing if the stock breaches $85. That would invalidate the recent breakout.
The reward is unlimited but consider ringing the register if JPMorgan climbs to $91.
As of this writing, Tyler Craig held bullish option positions in XLF.
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