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HEAD & SHOULDERS


Out-of-Place Patterns For JP Morgan Chase

11/20/08 09:21:52 AM
by Arthur Hill

JP Morgan formed a big broadening formation as part of a downtrend last year and has a bearish head & shoulders working over the last five months.

Security:   JPM
Position:   Sell

Figure 1 shows weekly candlesticks with a choppy downtrend over the last two years. The middle of this downtrend is punctuated by a broadening formation. These usually form as part of a topping process, not in the middle of downtrends. The pattern turned out bearish as the stock moved to new lows in July.

FIGURE 1: JPM, WEEKLY. Note the choppy downtrend over the last two years.
Graphic provided by: TeleChart2007.
 
Despite some seriously choppy trading, the overall trend remains down for the long term. The stock was trading in the low 50s in May 2007 and is currently in the low 30s. The red dotted line shows a linear regression from May 2007 to November 2008. With a negative slope, the long-term trend here is clearly down for JP Morgan.

Figure 2 shows daily candlesticks with another out-of-place pattern, a head & shoulders. I say "out of place," because it did not form after a big advance and the top of the head hit resistance from the 2008 highs. In any case, I see two shoulders, a head and a falling neckline. The falling neckline reflects lower lows and this shows consistent selling pressure. The green dotted line shows a horizontal support level that was broken over the last few days. JPM looks weak and I would expect a move to new lows.

FIGURE 2: JPM, DAILY. Note the head & shoulders pattern, which is out of place in this situation.
Graphic provided by: TeleChart2007.
 
On-balance volume (OBV) confirms selling pressure and the downtrend. OBV broke trendline support in October and moved to new lows in November. The trend is clearly down for this volume-based indicator. If volume precedes price, then JPM would be expected to reach new lows as well.



Arthur Hill

Arthur Hill is currently editor of TDTrader.com, a website specializing in trading strategies, sector/industry specific breadth stats and overall technical analysis. He passed the Society of Technical Analysts (STA London) diploma exam with distinction is a Certified Financial Technician (CFTe). Prior to TD Trader, he was the Chief Technical Analyst for Stockcharts.com and the main contributor to the ChartSchool.

Title: Editor
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