Saturday, October 31, 2009

How I Traded JPM

In March of this year, JP Morgan offered a rare opportunity to trade a very low risk/high reward pattern. I had been following the stock since the broader markets rolled over in October 2007. JPM peaked months earlier in May 2007. The wild swings offered traders a lot of opportunities, but I chose to stay on the sidelines as there was no discernable intermediate trend until November 2008, and by that time I was trading the SKF.

After the failed rally attempt in December 2008, the pattern began to come into focus. An ending diagonal triangle was developing which was heading toward a confluence of support. Looking at the big picture, the median line from the 2000 high through the 2002 to 2007 rally was projecting an intersection with support at the 2002 low and the lower trendline of the ending diagonal triangle.

As markets seemed to be heading into the abyss, fear was rampant, but as I commented in this blog, the markets were nearing the completion of a major elliott wave pattern at projected targets at an expected cycle low. With reasonable confidence that a rally of significance was about to commence, I projected the lower trendline to be at 16.50 on March 4. I entered a limit order to buy JPM at 16.50, which was filled on March 5. I did not use a hard stop loss. My exit plan was to sell JPM if it closed below the 2002 low, rallied and then failed. It tested but never closed below the 2002 low, and the rally began March 9.

The target for this trade was the origin of the EDT (ending diagonal triangle) at 50.63. I realized that given the wild swings in the stock it would most likely not make it all the way to the target, so I focused on the target zone of the range of the high day.

JPM peaked in wave (A) of its rally in May well short of the target. The hardest part of this trade was sitting through the wave (B) correction, but it was rather muted compared to some of the other financial stocks. Wave (C) finally got underway in July. It closed in the target zone on September 22, but then promptly closed below it. I waited for a second test of resistance at 45.23. On September 30, it began to fail without making it back above resistance and I exited the position at 44.54 for a gain of 170%. Of course, the stock managed to make a new rally high in October, but it has now rolled over in earnest and a significant correction of the rally is underway.

What made this trade unique is the rare confluence of so many factors including 3 areas of support, a high confidence elliott wave pattern completion, a stock market cycle low and impending rally. In particular, my confidence in this trade was high because I stayed on the sidelines for almost 2 years as I observed and waited for the opportunity to present itself. When the time was right, I pulled the trigger without hesitation.

Sometimes we get so caught up in trying to capture every zig and zag, we miss the real opportunities. This is a perfect example that you don't always have to be in the market or trading every move of a stock to make big profits.

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