- November 30, 2008
- Posted by: Ramki Ramakrishnan
- Category: US Stocks outlook
David has added JPM to his short watch list, and has asked what I thought. On 18 Nov, this stock had closed at $32.14. On 21 Nov, it posted a low of 19.69, a loss of nearly 39% in 3 sessions! And just four days later, it has traded at 31.93, a gain of 62%. Wow! After such incredible moves from a giant in the banking industry, we need to look carefully before taking a short position.
Trend reversals are seldom straight-line affairs. We usually get a second attempt at the downside. For JPM, the trend is clearly still down. We just have to be careful about how much exposure we take on at any time, especially considering the high volatility. I see some good resistance around $32.20, and would start with selling short one-third to one-half my usual position size. A nearby stop can be placed at 32.60, but I would reinstate shorts as it comes back to that level from any test higher. The next resistance comes at 33.78, which is a 61.8% retracement level of the prior down move. So if I am stopped, I will see if the stock is able to reach this second level and sell there, with a close stop. As I have indicated in the accompanying chart, this is going to be a quick trade, because corrections seldom end with a 5-wave move, and we can observe that the current rally from 19.69 is a 5-wave affair. (Can it be possible that this is not a correction, but a start of a new trend? Yes, it is possible, but we will very likely get a deep 2nd wave correction if this is the case. This is another reason I don’t wish to overstay any short position).
Elliot Wave analysis of JPM (J.P.morgan Chase) or any other stock often gives useful clues about the next direction. We don’t need to know at this time whether the next decline is a 2nd wave or a ‘B’ wave. It is enough to know that we will get a decline, probably a deep decline, followed by another rally (either as a 3rd wave, or a C wave). We will so take profits on existing longs now, and maybe create a small short position, but be quick to take profits, because of the high likelihood of another quick move higher.