Commercial banks have run in place since the Federal Reserve raised interest rates on Dec. 13, even though higher yields should widen overnight spreads and increase profits. Tax reform should add to banks' bottom lines as well, with higher economic growth translating into greater borrowing demand. Other sectors have acted as expected in reaction to these catalysts, with metals, transports and early cyclicals charging to new highs.

End-of-year accounting is the likely culprit, with fund managers locking in 2017 gains during mid-December options expiration and heading out for their holiday breaks. If so, banks could head sharply higher in January while other leadership groups get sold due to capital gains selling pressure, Indeed, the banking sector may be bulletproof because current technicals indicate plenty of running room for the current uptrend. (See also: Banks Set to Profit From Tax Cuts and Rate Hikes.)

 

Bank of America Corporation (BAC) shares sold off from the mid-$50s to $2.53 during the 2008 economic collapse and bounced to $20 in 2010. The stock finally broke out above that resistance level in the fourth quarter of 2016, entering a strong uptrend that has generated a 35% return so far in 2017. Even so, the rally just crossed the 50% retracement of last decade's historic decline, indicating that this uptick could eventually reach the mid-$40s.

The stock is currently ticking higher within a rising wedge pattern with support just below $29.50. A breakdown could drop the price into the 50-day exponential moving average (EMA) and three-month rising trendline near $27.90, offering a low-risk buying opportunity. A bounce at or near that level could profit from continued upside into the mid-$30s, where the .618 retracement level and September 2008 high are likely to slow or stall progress. (For more, see: Bank of America Could Rise by More Than 30%.)

 

JP Morgan Chase & Co. (JPM) stock returned to resistance at the 2000 high in the upper $50s in 2015 and eased into narrow range-bound action, ahead of a major breakout following the presidential election. The rally stalled in the mid-$90s in March 2017, giving way to a rounded correction and secondary October breakout. The nascent uptick stalled quickly at $100, a natural psychological barrier, and mounted that level in late November.

The stock posted a new high at $108.40 on Dec. 4 and dropped into an ascending triangle pattern that remains in force as the trading year draws to a close. A breakout would open the door to the $112 to $115 price zone, while a decline out of the triangle should set off potent buying signals near new support at $100. In either case, the stock should offer impressive 2018 returns despite gaining nearly 25% in 2017. (See also: JPMorgan Is Taking a Page From Amazon Prime.)

 

Citigroup Inc. (C) shares bounced to $50 in 2010 following a near death spiral that started at a reverse split-adjusted $570 in 2007. That swing high stalled further progress into a June 2017 breakout that unfolded through a rising channel that is still in place six months later. Gains have been limited in the fourth quarter, with the stock now trading at early October levels. Price action has carved a bullish consolidation since that time, with a rally above $77 likely to attract broad buying interest.

The dilutive one-for-ten reverse split in 2011 lowers the odds that the stock will reach the .382 Fibonacci bear market retracement level at $220 in the coming years, but it could rally into $120, the midpoint of the climactic September 2008 into March 2009 selling wave. More conservatively, a long-term top around the .382 retracement level in the mid-$90s would still offer excellent long-term returns from current price levels. (For more, see: How Citigroup Makes Its Money.)

The Bottom Line

Banks have paused at year end, but their strong uptrends should resume in early 2018. Commitments by U.S. corporations to increase spending following tax reform could stoke the speculative fires, so it makes sense to keep close watch on commentary during fourth quarter earnings season, starting in two weeks. (For additional reading, check out: Stock Returns May Top 10% in 2018 Led by Big Banks.)

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

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