Big Banks Get Sold After Earnings

The first batch of second quarter bank earnings failed to inspire buying interest in Friday's session, triggering minor downturns in shares of JPMorgan Chase & Co. (JPM), Citigroup Inc. (C) and Wells Fargo & Company (WFC). Bank of America Corporation (BAC) stock is marginally trading higher following an upbeat report in Monday's pre-market, but aggressive sellers could reload positions after the opening bell. 

The limp reaction despite tax cuts and a booming U.S. economy continues bearish action in place since January, when the stocks in the commercial banking sector topped out and entered intermediate corrections. They've been churning around their 200-day exponential moving averages (EMAs) for several months now but still haven't attracted committed buyers. Losses have been contained, but distribution patterns throughout the sector could presage a more substantial downturn into 2019 and beyond.

Rising interest rates, weak corporate investment and a looming trade war have had an adverse effect on this market group, which isn't surprising because the large banks have underperformed for many years after the 2008 economic collapse. The November 2016 presidential election finally triggered a breakout, but given the Federal Reserve's aggressive rate hike schedule, it's possible that the sector's multi-year uptrend has run its course. (See also: 6 Big Bank Stocks May Face More Pain Ahead.) 

Dow component JPMorgan Chase & Co. (JPM) broke out above 16-year resistance in 2016 and entered a powerful trend advance that topped out just below $120 in January 2018. Two breakout attempts into March failed, giving way to a shallow downtick that has posted a growing series of lower highs and lower lows. The stock reached the 200-day EMA in late May and broke that level in June.

A pre-earnings buying wave remounted the barrier, while the quarterly report triggered renewed selling pressure. A secondary breakdown could establish heavy resistance around $105 while setting the stage for a deeper slide that could reach the mid-$80s. The last rally leg between June 2017 and January 2018 started at $81.64, a support level that bulls need to defend at all costs to avoid a major downtrend. (For more, see: JPMorgan Reports Earnings in Rebound Mode.)

Citigroup Inc. (C) underperformed its peers for many years following last decade's bear market, forced to issue a 1-for-10 reverse split to stay in business. The 2009 resistance level in the mid-$50s failed to budge until a 2016 breakout lifted the banking giant into market leadership. The rally stalled just above $80 in January 2018, giving way to a series of lower highs and lower lows that broke the 200-day EMA in March.

The stock has tested the underside of the broken moving average four times but has failed to remount the barrier. Even so, it's still trading near March price levels, indicating a standoff rather than an active downtrend. The monthly stochastic oscillator is getting close to the first oversold reading since early 2016, raising hopes that a bottom is getting close. However, time is running out, with frustrated shareholders watching other sectors probing new highs.

Wells Fargo & Company (WFC) has shot itself in the foot repeatedly in recent years, caught in a series of scandals and corporate misdeeds. It topped out in the upper $50s in 2015 and sold off into the fourth quarter of 2016, coming to rest at the 200-week EMA in the mid-$40s. The stock turned higher with the banking sector into 2017 and reached resistance at the prior high in March. A major breakout into January 2018 reached an all-time high in the mid-$60s, but aggressive sellers attacked the bid, triggering a failed breakout

The downturn reached the 200-day EMA in February and broke support in March, descending to a seven-month low near $50. The stock has been gaining ground since April, but the three-month bear flag pattern predicts that sellers will eventually return in force and drop the banking giant to a new low. The current uptick could reach the $58 to $60 price zone before that happens, while a break of flag support would set off an aggressive sell signal. (For more, see: Wells Fargo Stock May Fall 7% Amid Tepid Growth.)

The Bottom Line

Major commercial banks got sold after reporting second quarter earnings on Friday, continuing bearish price action that could signal long-term tops. (For additional reading, check out: The Role of Commercial Banks in the Economy.)

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