Financials rallied back to their mid-August highs on Monday, and TradingAnalysis.com founder Todd Gordon says JPMorgan is one big bank that could see a bounce.
The basic call is pinned on what Gordon sees happening in the bond market.
“The financials are acting quite strong as bonds are threatening a breakdown, so you could find potentially higher rates,” he explained Monday on CNBC’s “Trading Nation.”
To illustrate his point, on a chart of TLT, the ETF that tracks long-term Treasury bonds, Gordon draws a line connecting TLT’s lows over the past few months. The drop in TLT this month has Gordon predicting that the ETF could actually fall down back to that line at around $125.
“If you were to see a break [through $125], that is lower bonds, [it would mean] higher yields and that is going to give a much-needed boost to financials,” he said.
What’s more, the chart of the XLF financials-tracking ETF is showing bullish technical signs as well, according to Gordon. He points to an “inverse head and shoulders” pattern as proof that XLF could bounce back to its early August highs near $25.50.
A similar “inverse head and shoulders” pattern has also appeared in the chart of JPMorgan in particular, says Gordon, serving as one of the indicators that has the trader betting on a breakout for the bank. In addition, Gordon believes JPMorgan is completing another bullish pattern known as a “bull flag,” which suggests to him that the bank stock will rally back to its previous August highs.
“It does look like we are breaking up through the $92 region, and we’re going to go ahead for a retest of $95,” he said.
Since Gordon sees JPMorgan bouncing 2 percent from Monday’s levels, he is buying the October monthly 92-strike calls and selling the October monthly 95-strike calls for about $1.23, or $123 per options spread. If JPMorgan closes above $95 on Oct. 20 expiration, Gordon would make a maximum profit of about $177. But if JPMorgan were to close below $92, then he would lose the $123 he paid to make the trade.
In order to avoid such a loss, Gordon establishes a point to get out of the trade.
“The $1.23 that I just laid out in premium, if that gets cut in half to about 61 cents or 62 cents, [I’m going to] go ahead and cut the trade,” said Gordon.
With Monday’s rally in the financials, JPMorgan is up almost 8 percent year to date.