Major bank funds have sold off to price levels struck just two weeks after the 2016 presidential election and could break down in coming months, entering bear markets. Top-tier commercial players are acting better than lesser known institutions, but both segments are struggling with rising interest rates, low business investment and a deteriorating housing market. Expect the big boys to play catch-up if trade wars signal the end of the multi-year economic expansion.

The bank funds rose sharply in the weeks following the election, and there's still breathing room before they give up the last tranche of gains posted during that fruitful period. However, these funds have acted poorly for months now, and there's little reason to believe they'll rally in 2019 due to growing odds for slowing U.S. and world economies. Of course, things could change overnight if the U.S. and China act like adults and reach agreements on trade and intellectual property.

Technical chart showing the performance of the SPDR S&P Bank ETF (KBE)

The SPDR S&P Bank ETF (KBE) ran in place between 2013 and 2016 despite the strongest bull market in decades. It broke out in November 2016 but underperformed badly in 2017, grinding sideways after the brief but vertical rally impulse. An advance into 2018 ended quickly, trapping bulls in a persistent decline that found support in October at the September 2017 low. Price action since that time has been bearish, with a bounce to resistance at the 50-day exponential moving average (EMA) followed by a sell-off that is now testing the prior low.

Fortunately for remaining bulls, the sideways pattern in place since December 2016 looks incomplete, perhaps setting the stage for a recovery wave in the first quarter of 2019. However, that sword cuts both ways because a bounce to $46.50 might complete the right shoulder of a head and shoulders top, ahead of a historic breakdown that fills the post-election day gap at $35 as an initial downside target.

Technical chart showing the performance of the SPDR S&P Regional Bank ETF (KRE)

The SPDR S&P Regional Bank ETF (KRE) has carved a nearly identical pattern even though these instruments can go through long periods of low correlation, suggesting that macro themes bind their fates. Unlike its rival, this fund reached an all-time high in 2017, underpinned by broad optimism that Trump fiscal policies would improve profits at the grassroots level through a mortgage boom and healthy business spending.

Unfortunately, higher interest rates and tariff talk put a damper on both activities, triggering a broad-based retreat. The fund also tested the September 2017 low in October 2018 and has returned to that critical support level after failing to mount 50-day EMA resistance. Even so, the on-balance volume (OBV) accumulation-distribution indicator shows a recent pick-up in buying pressure that could support a final bounce, prior to a breakdown.

Technical chart showing the performance of Citigroup Inc. (C) stock

Citigroup Inc. (C) stock has carved the most bearish pattern of the big commercial banks and should be watched closely because a failure to bounce at the current price level could precede a sector-wide decline. It completed a round trip into the 2015 high at $61 in January 2017 and eased into a trading range that carved the handle within a cup and handle breakout pattern. The stock rallied to new highs in June 2017 and added points at a healthy pace into January 2018's nine-year high at $80.70.

The stock then rolled into a series of lower highs and lower lows, breaking cup and handle breakout support earlier this week. This price action could mark a significant breakdown or a selling climax that traps overeager bears. The stakes are high because a confirmed breakdown would add to a laundry list of sell signals predicting that commercial and regional banks will enter bear markets in 2019.

The Bottom Line

Banks are probing 52-week lows after topping out in January 2018 and could break down, entering multi-year downtrends. 

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