JPMorgan (JPM) on the Rise Ahead of Earnings Season

As key earnings reports approach for some of the largest stocks in the financial sector to kick off earnings season, an analysis of both recent price action and option activity can grant chart watchers a deeper understanding of the sentiment traders and investors have toward individual companies. One such company is JPMorgan Chase & Co. (JPM). Since it is the largest U.S. bank, investors will be keen to eye the earnings report of JPMorgan, especially as the economy wades deeper into an inflationary environment.

Traders and investors have recently bid up the share prices of JPMorgan to an extreme range ahead of the company's fiscal fourth quarter earnings announcement. Analysts expect JPMorgan to announce $3.06 in earnings per share (EPS) to go along with $29.69 billion in revenue. These figures represent a year-over-year increase for both key metrics. Bank earnings over the past year have benefitted from record activity in equity markets, low loan demand, and friendly credit conditions that allowed reserve releases.

Consider that, while the open interest for JPMorgan features a larger number of put options than calls, the implied volatility built into those prices suggests that traders are selling these options, perhaps with a few notable exceptions.

As the specter of inflation looms, investors appear to be moving funds into sectors positioned to benefit from rising interest rates. The financial sector stands to benefit from small increases in interest rates, and the market is preparing for a steepening yield curve to benefit bank margins.

Over the past month, JPMorgan has outperformed the market as a whole. In this time frame, State Street's S&P 500 Index ETF (SPY) has fallen by 0.2%, while JPMorgan stock has risen nearly 6%.

Current Trends

Comparing recent price action and option trading can provide insight into the overall sentiment that traders and investors possess toward a company's future performance. The key to maximizing this insight is to understand the context in which the price behavior took place. The chart below illustrates the price action for JPMorgan shares as of Monday, Jan. 10, illustrating the setup ahead of the earnings report.

Since last reporting earnings in October, JPMorgan's share price briefly rose, then experienced a downward trend from late October until mid-December, highlighted via the red arrow. The share price gradually rose, before sharply climbing above its 20-day moving average. The price has recently been closing in an extreme high range as depicted by the technical studies on this chart.

The studies are formed by 20-day Keltner Channel indicators. These depict price levels that represent a multiple of the average true range (ATR) for the stock. This array helps to highlight the way the price has risen from the middle portion of this range to the upper bounds. This price move from JPMorgan shares implies that investors could be gaining confidence in the stock as the earnings release approaches.

The chart also highlights the performance of JPMorgan stock after reporting earnings for the previous quarter. After reporting earnings in mid-October, JPMorgan stock fell 2.6% the day of reporting earnings, then proceeded to rise to 52-week highs over the next nine trading sessions, before beginning the prolonged downward trend. This is important to consider if traders and investors are anticipating a similar post earnings move for JPMorgan stock for this quarter.

Volume Profile and Options Look

Price action, in a vacuum, theoretically can indicate the overall sentiment toward any particular stock. However, providing further context to this price action can paint a clearer picture, while illuminating key details for chart watchers. The chart below illustrates the recent price action of JPMorgan, in addition to a price-based volume pattern on the left-hand side.

The price-based volume pattern illustrates the prices where investors have bought and sold the shares previously. When volumes at a given price are scant, it implies that few, if any, investors have positions to defend at these levels. A significant amount of buying in the past often implies that traders and investors feel the need to defend their positions at those same prices by either buying more shares or at least not selling further.

There are a few notable zones of price and volume action on this chart. At the bottom of this chart, near the $155 range, there is a thin zone of low to no volume, highlighted by the red rectangle. This area could be seen as a low area of support for prices, as the only time the price fell below this level, in late December, it was bought up.

Conversely, near the current closing price of JPMorgan, there is a zone of higher-than-normal buying, highlighted by the green rectangle. This area features the heaviest trading volumes, which can also be considered a point of control. This identifies the price level where the most trades took place. For JPMorgan, the point of control appears on the chart around the $167 price level.

The volume profile is intriguing considering the recent activity of option traders. At first glance, it appears that option traders are bearish toward JPMorgan, as the open interest features 649,000 puts compared to 471,000 calls. However, recent trading volumes skew bullishly. That's because, on Monday, Jan. 10, option traders favored calls over puts at a more than 3-to-1 ratio.

A further analysis of option activity can provide insight into the sentiment of option traders. For Jan. 21, the next monthly option expiration date, the highest open interest is on the $170 call, with 40,000. This represents a 1.6% upside to the current price of JPMorgan stock; however, it is intriguing because this level in the volume profile is a relatively bearish zone where more selling than buying has taken place.

For the Jan. 21 expiration date, the open interest features 151,000 calls compared to 283,000 puts. It should be noted that a high number of these put options are significantly out of the money. The highest put option open interest is on the $75 put and $95 put, with 22,000 and 21,000 respectively. This could represent the actions of option sellers wishing to capture elevated premiums ahead of earnings.

There is open interest of 12,000 at the $155 put. This coincides nearly perfectly with the relative thin zone on the volume profile chart. This option represents 7% downside to the price of JPMorgan stock.

For strikes at the money and one strike either direction in the option chain, calls heavily outnumber puts—63,000 to 21,000. It's notable that option traders appear to be selling the $167.50 put option, as this option has currently seen an increase in open interest but a decrease in implied volatility, suggesting that traders are selling more contracts on short positions in the option. This is relatively bullish, especially considering that this option is at the money.

Looking Ahead

JPMorgan stock can certainly be considered a bellwether stock. While far from the largest or most influential stock, bank earnings set the tone for earnings season. As a member of both the Dow Jones Industrial Average and the S&P 500, it's possible that JPMorgan earnings could move indexes directly. Investors may hold lofty expectations for JPMorgan and the financial sector as a whole, especially considering the recent positive performance of the sector. If JPMorgan and other financial stocks were to underwhelm, the unwinding of positions could have significant repercussions on the market.

No matter how the company reports, it should have a significant impact on stocks in the financial sector. An emphatically positive or negative report could set the stage for financial stocks reporting in the near term, such as Morgan Stanley (MS) or The Goldman Sachs Group, Inc. (GS). Either way, it will be interesting to see how JPMorgan and other financial stocks reporting earnings to start earnings season have an overall effect on market volatility.

Wrapping Up

Investors will pay keen attention to the earnings results of JPMorgan as the largest bank in the United States. Investors have recently bid JPMorgan share prices up to an extreme range, while option traders appear to be positioning themselves for further upside in the JPMorgan share price in the near term.