Equity markets were broadly higher on Wednesday as investors rejoiced over a robust China GDP report and stimulating words from Chairman Bernanke. “The possibility remains that the recent weakness may prove more persistent than expected and that deflationary risks might reemerge, implying additional policy support,” Bernanke told the House Financial Services Committee, in the first of two days of testimony about economy and monetary policy. Hints of a possible QE3 pushed stocks higher from the opening bell, although the rally did lose steam around lunch time. Gold was also in the green and the hot yellow metal rallied to new highs and futures prices hit $1,588 an ounce. Oil surged as well, hitting $99.21 a barrel mid-day, but consolidated lower towards $98 as trading hours on Wall Street were coming to a close.
JPMorgan Chase (JPM) is slated to report its latest earnings tomorrow morning, which makes the HOLDRS Regional Bank Holdings Fund (RKH) our ETF to watch given that JPM accounts for about 23% of the fund’s total assets [try our Free ETF Stock Exposure Tool]. Analysts are expecting the financial behemoth to earn $1.21 per share, which would be an 11% increase from the company’s earnings for the same quarter one year ago. JPMorgan has beaten the street’s expectations for the last four quarters and analysts are predicting revenues upwards of $25.2 billion this time around [see RKH Holdings].
Consider the daily chart of RKH below. The fund has trended higher over the past two years, however, RKH has shed nearly 15% since topping out above $90 a share in mid-February of 2011. This fund is also currently trading below its 200-day moving average (yellow line), which suggests that RKH is potentially due for a bounce higher if it manages to establish support at or above current levels. RKH is also establishing rising levels of support, now holding above the $75 level, which gives weight to a bullish outlook for the ETF over the coming weeks.
If JPMorgan’s earnings disappoint then RKH could very easily slip below $77 a share. On the other hand, a bullish market reaction will likely send shares higher and closer towards the $80 level, which is also where the first level of resistance comes in at [see RKH Technicals]. From a longer-term perspective, RKH is very attractive at current levels seeing as the fund is near the bottom of its trading-range. The Stochastic Momentum Index is currently in oversold territory, however, this does not guarantee that further downside is out of the question. In fact, conservative investors should wait until the fund is back above its 200-day moving average before jumping in. In terms of upside, the $80 and $85 level both appear to be reasonable targets. Investors should be worried if shares of RKH dip below the $75 mark, in which case further downside risk would extend to $70 a share and below. As always, investors of all experience levels are advised to use stop-loss orders and practice disciplined profit taking techniques.
Disclosure: No positions at time of writing.