Stock analysis

Bank Stocks Nearing Intermediate Breakdowns

Bank stocks have struggled since topping out in March, hampered by a persistent downturn in commercial lending as well as low inflation that has forced the Federal Reserve to delay its aggressive rate hike schedule. Sector funds have now dropped into intermediate support, signaling possible breakdowns that bring into play deeper support at November 2016 breakout levels.

The sector got bought aggressively in November and December, underpinned by high expectations that the business-friendly Trump administration would institute tax cuts and deregulatory actions to generate higher U.S. growth rates. The first nine months of the new presidency have failed to achieve those goals, inducing many shareholders to dump positions and pursue profits in more rewarding venues, including big tech. (See also: How Trump Can Unilaterally Deregulate Big Banks.)

The reality of an aging business cycle is also hitting home, with the U.S. now engaged in the ninth year of an economic expansion. In addition, geopolitical tensions are generating a risk-averse environment that is forcing large chunks of institutional capital to rotate out of growth plays and into more defensive instruments, including bonds and precious metals. In turn, this global shift could finally end the long expansion and drop the economy into a recession.

The SPDR S&P Bank ETF (KBE) stalled at the 50% retracement​ of the 2007 to 2009 bear market in 2014, dropping into a choppy sideways pattern that found support at the .386 retracement level in March 2016. It bounced to resistance in November and broke out, stalling within three points of the .786 retracement level in March 2017. The subsequent pullback found support near $40.50 in late March, while the ensuing upturn fizzled out above $44.

The fund has traded within those narrow boundaries for the past four months, denying multiple breakout and breakdown attempts. It has been hovering near range support for more than three weeks, failing to attract even minor buying interest, suggesting that it will finally break down and head into a test of the November breakout near $35. The long-term technical tone will remain bullish as long as that level holds, while a breakdown could signal the start of a multi-year downtrend. (For more, see: 5 Reasons to Buy Bank ETFs Despite Low Rates.)

JPMorgan Chase & Co. (JPM) has led the banking sector since the 2008 economic collapse, emerging from the maelstrom with a stronger balance sheet than its rivals. It returned to the 2000 rally high at $67.20 in 2015 and ground sideways into a November 2016 breakout that stalled near $94 in March 2017. July and August breakout attempts failed, giving way to a decline that carved the outline of a small-scale head and shoulders pattern.

The stock broke the neckline on higher-than-average volume on Monday and is now testing new resistance. A sell-off through $89 would confirm the breakdown, favoring continued downside into January and May support near $80. In turn, that price action could mark the next stage in a progressive decline that brings the November 2016 breakout into play. On-balance volume (OBV) is waving a red flag in that regard, failing to bounce during the summer breakout attempt. (See also: Bank Stocks Are Poised to Fall Further.)

Wells-Fargo & Company (WFC) has traveled a different path in recent years, first outperforming its peers and then plunging after scandalous disclosures about fake accounts. The stock topped out at $58.76 in July 2015 and entered a volatile correction that found support at a two-year low in the mid-$40s in October 2016, ahead of a post-election rally that generated a false breakout in February 2017.

Price action since that time has carved a multi-wave decline that is nearing a 10-month low. More importantly, Wells Fargo is the first big bank to give up gains posted immediately following the November election. At this point, continued selling pressure into the upper $40s would generate a wave of bearish signals that could presage a trip into the 2016 low and the completion of a multi-year double top. (For more, see: Wells Fargo Troubles Shift From Phony Bank Accounts to Real Ones.)

The Bottom Line

Bank stocks are struggling to hold intermediate support levels, with growing headwinds likely to trigger breakdowns ahead of important testing at the November 2016 breakout levels. (For additional reading, check out: Bank Stocks Are Correcting: Here’s Where They Go Next.)

<Disclosure: The author held no positions in aforementioned securities at the time of publication.>