• Volatility in U.S. equities is catching the market off guard today, but there is a trade-off to be made.
  • The committed bulls are trapped, hoping that 21-DMA will hold up for a second time.

The fact that JP Morgan’s share price cannot sustain gains after a very strong and surprisingly positive second quarter earnings report speaks volumes. So does the inability of the NDX to sustain a 2% rise to historical highs.

The trapped bulls may have a second chance, but the path of least resistance may now be down if a certain structure breaks down.

In such a case, the less committed bulls will turn around and side with the bears, where much greater opportunities would present themselves if their bearish thesis was correct

JPMorgan Chase has downgraded its second quarter earnings forecast, but there are bearish nuggets here as well, mainly around the direction and threat of the coronavirus ramifications and the limits of banks’ ability to monetize their assets

In addition, the Federal Reserve has signalled that zero interest rates will not disappear any time soon.

Bad debt write-offs will no doubt be a factor in this week’s forecast, due to a market with limited liquidity and massive unemployment

In fact, earnings were down more than 50% from the previous year as JPMorgan Chase increased its loan loss reserves to protect against potential defaults, but the results were helped by record trading revenues.

Despite some recent positive macroeconomic data and significant and decisive government action, we still face great uncertainty about the future path of the economy”

Jamie Dimon, CEO of Chase, said in a news release

However, we are prepared for all eventualities as our fortress record allows us to remain a port in the storm.

JPMorgan Chase, the nation’s largest bank in terms of assets, is setting aside $8.9 billion for expected losses but is posting better-than-expected revenues of $4.69 billion.

Meanwhile, Barr Citi’s outstanding results, their reports and those of Wells Fargo have not been so rosy..

Wells Fargo, which is subject to various banking restrictions after a false account scandal in 2016, recorded its first quarterly loss since 2008, setting aside $8.4 billion for early payment defaults.

In the case of Wells Fargo, the main factor in reducing profits or direct losses is the fact that banks are preparing to deal with a slew of toxic loans caused by the pandemic

However, Citigroup also exceeded expectations despite a decline in net income from $4.8 billion to $1.3 billion.

If results such as Wells Fargo’s or signs of uncertainty seem usual in the rest of the major banks with a similar set of companies that are expected to report earnings in the coming days, the week could prove to be a winner for the bears.

S&P Global Ratings warned last week that banks around the world will eventually suffer credit losses of about $2.1 trillion between this year and next.

Bank stocks have been battered in 2020 so far

That is why bank shares have been hit hard this year.

The KBW Banking Index (BKX) has lost more than a third of its value this year, placing it far behind the 2% drop in the S&P 500 in 2020.

The S&P Bank SPDR ETF, or KBE, which finished up 4.8% on Friday, the highest-paying sector for the end of the week, is down today by more than 2.6%.

To date, the EFC is down 37% from its 2020 highs

Looking ahead, Goldman Sachs releases a pre-market report on Wednesday, and Bank of America and Morgan Stanley a pre-market report on Thursday.

S&P 500 Index Levels

According to this week’s S&P 500 Index: Bank Profits in Focus, COVID-19 forecast, which led to fears of insolvency dissipates, the index has indeed struggled to June highs.

The index momentarily hit new highs during a break in counter-trend resistance, only to trap the bulls in a bear trap and then abruptly return to the 21-day moving average.

Here is the beginning of the week’s outlook chart compared to today’s chart to show that the bearish trend is underway:

Rupture below the counter-trend line as a result of the bull trap

Trapped bulls may get a second chance if the 21-day moving average is maintained and the price moves back above the counterparty’s trend line and then maintains daily closings above it to form a new support structure

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