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US stock indices have a banking problem

I featured this chart in last week’s outlook video, Trading gets political

JP Morgan released its quarterly profit result on Friday. This was well enough received, allowing the stock to hold support on the day. However, traders were provided with an opportunity when Friday’s high again rejecting resistance. As at Friday’s close, the stock was up 23% since the election and 31% since its last major base in late September.

This didn’t last. Broker downgrades saw the profit taking floodgates open for US bank stocks when trading resumed on Tuesday. In JP Morgan’s case, this resulted in a gap below support and a weak close near the day’s low. Investors are becoming concerned that current valuations for bank stocks are entirely dependent on good and early outcomes from the Trump Administration on tax policy and reforms to bank regulation.

A relatively modest correction of the rally from late September could see JP Morgan back to the 38.2% Fibonacci retracement and old resistance zone around $79-$80.50. That support zone is around 3.5-5.5% below current levels

A move of that size or greater in bank stocks would of course be a negative for the market indices. In the case of the S&P 500 it’s likely to see a completion of the double top pattern on the chart below, leading to a correction of the whole, post-election rally


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