Bank stocks faltered in May, giving up substantial ground before dip buyers came to the rescue dangerously close to March's deep lows. The subsequent uptick has been dramatic, lifting sector funds and top names in vertical recovery waves, but those rally impulses are now approaching heavy resistance levels. In turn, these obstacles could ignite reversals and renewed selling pressure, offering low-risk short sale opportunities for skilled traders and investors.

Whatever happens next, bank stocks have re-entered trading ranges that have stretched across five years, highlighting the need for swing trading strategies that take advantage of the endless ups and downs. A sustained breakout or breakdown might not be in the cards this year, given election and pandemic uncertainty, raising the odds that the group will just tread water until a new administration makes bold moves or the coronavirus forces another downturn in world economies. 

Chart showing the share price performance of the SPDR S&P Bank ETF (KBE)
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The SPDR S&P Bank ETF (KBE) broke out above 2015 resistance in the upper $30s after the 2016 presidential election, reaching a 10-year high at $52 in March 2018. It tested the breakout level successfully in December and turned higher into 2019, but the uptick failed to reach the prior peak, posting a lower high in the upper $40s in December 2019. It sold off into 2020 and failed the breakout during the first quarter swoon, undercutting the 2016 low by more than four points before bottoming out in March.

The bounce into April reinstated a trading range that has now posted one failed breakout and one failed breakdown. In turn, this reinforces range resistance between the mid-$20s and mid-$30s, which matches the uptick posted since the fund hit a six-week low on May 14. The 200-day exponential moving average (EMA), broken on heavy volume in February, has now aligned with resistance, raising the odds for a reversal and retracement that rewards timely short sales.

Chart showing the share price performance of JPMorgan Chase & Co. (JPM)
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Dow component JPMorgan Chase & Co. (JPM) has outperformed the fund and most peers in the past decade, breaking out to an all-time high after the election and entering a trend advance that stalled near $120 in March 2018. It sold off into the low $90s in December and turned higher into 2019, breaking out to a new high in October. The rally posted an all-time high at $141.10 in January, giving way to a small topping pattern that broke to the downside in February.

The stock failed the 2019 breakout a few sessions later and entered a vertical slide that ended within a few points of the 2016 breakout level in March. The subsequent uptick just mounted the broken 200-day EMA and has arrived at heavy resistance generated by the failed breakout and .618 Fibonacci selloff retracement level, which have narrowly aligned. The on-balance volume (OBV) accumulation-distribution indicator hit a 14-month low in May, while subsequent buying power has failed to match price action, adding to the odds for a reversal and profitable downturn.

BAC
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Bank of America Corporation (BAC) stock broke out above eight-year resistance in the upper teens after the election, lifting to a nine-year high in the low $30s in February 2008. It then carved a long series of lower highs, generating a descending trendline that broke to the upside in October 2019. The stock rallied above the 2018 high in November but failed the uptrend in February and the trendline a few sessions later, dumping to a three-year low in the upper teens.

Buoyant price action remounted the broken December 2018 low in April and completed a successful test at that level in May, yielding a vertical impulse that has now reached the broken trendline and .618 Fibonacci selloff retracement level in the upper $20s. At the same time, OBV remains stuck under the April high even though price is trading at a two-and-a-half-month high, highlighting weak buying power that could presage a reversal and selloff at resistance.

The Bottom Line

Bank stocks have reached strong resistance after vertical recovery waves and could reverse, offering opportune short sale profits.

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