How to Trade Large Bank Earnings This Week

NEW YORK (TheStreet) -- The earnings parade picks up speed this week with 13 larger banks reporting second-quarter results.

The earnings bar has been raised after the strong performance from two "too-big-to-fail" banks, JPMorgan Chase ( JPM) and Wells Fargo ( WFC) as these stocks rallied 6% and 3.25%, respectively, on Friday.

I profiled JPMorgan Chase and Wells Fargo a week ago in "Key Earnings Reports This Week", and the pop in JPMorgan Chase's shares was not surprising as the "London Whale" derivatives loss was shy of the $9 billion that some analysts feared.

The bank reported a loss of $5.8 billion and said it may increase by another $1.6 billion.

The better-than-expected earnings report was helped by the bank's reduction in reserve for losses. This practice has been an underlying theme in earnings from banks over the past several quarters.

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My benchmark for the larger banks it's the KBW Bank Index (BKX), which consists of 24 of the U.S.'s largest FDIC-Insured financial institutions.

The BKX is up 41.0% since October 2011 and 16.5% year to date.

The weekly chart of the index (below) is positive with a rising momentum reading (12x3x3 weekly slow Stochastic) with a weekly close above the five-week modified moving average at 45.25, and above the 200-week simple moving average at 44.95.

My annual value level is 42.98 with a quarterly pivot at 46.03 and a monthly risky level at 48.61 vs. the March 19 high at 50.69.

Source: Thomson Reuters

Table of ValuEngine Data on Large Banks

How to read the table:

OV/UN Valued: All 13 large banks are undervalued, according to ValuEngine.

VE Rating: A 3-Engine rating is a Hold, while a 4-Engine rating is a Buy.

Last 12-Month Return (%): Banks with a red number declined by that percentage. Those with a black number increased by that percentage.

Forecast One-Year Return: All numbers are black, indicating that all 13 banks in the table are projected to move sideways to higher over the next 12 months.

P/E Ratios: Large banks have favorable forward price-to-earnings ratios between 7.2 and 15.9.

Value Level: The price at which to buy on weakness during the time frame referenced: W-weekly; M-monthly; Q-quarterly; S-semiannual; or A-annual. You buy on weakness to establish or add to a long position, or cover a short, or become less short.

Pivot: A price that should be a magnet during the time frame referenced: W-weekly; M-monthly; Q-quarterly; S-semiannual; or A-annual.

Risky Level: The price at which to sell on strength during the time frame referenced: M-monthly; Q-quarterly; S-semiannual; or A-annual. You sell on strength to establish a short position or add to a short position, or remove a long position, or become less long.

I advocate the use of good-'til-cancelled limit orders to add to long positions or become less short on share price weakness to the value levels. Traders should enter GTC limit orders to reduce their long positions or to add to a short position on strength to risky levels.

At the time of publication, the author had no positions in stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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