Commercial banks sold off in April despite strong first quarter earnings reports, with the bearish reaction continuing into the first week of May. The bank stocks have bounced into mid-month, but the uptick is unlikely to generate a breakout above bull market highs posted earlier this year. More likely, short sellers will reload positions in the next week or two, dropping the sector's biggest names back to the lowest lows since November 2017.

Rising interest rates are good for banks, at least early in the cycle, because wider overnight spreads should generate higher profits. That revenue may already be baked into current prices, with steady but unimpressive 2018 growth acting as the major headwind. If you recall, banks rallied strongly when the tax cut bill was passed, with buyers speculating that freed-up capital would translate into higher wages, GDP and business activity.

The U.S. economy continues to hum along in 2018, but the tax cuts have added little upside so far, with the GDP growth rate declining for a second quarter, recording a paltry 2.3% uptick in the three months ended March 31. Early second quarter readings stand at 4.0%, but there's little confidence that the final number will reach that high, especially with lower-than-expected March and April employment that now projects annual wage increases under 3.0%. (See also: 8 Bank Stocks to Lead the Market in 2018: Goldman.)

Dow component JPMorgan Chase & Co. (JPM) broke out above the 2015 high at $70.61 in November 2016 and entered a strong trend advance that eased into a rising channel in May 2017. It posted an all-time high at $119.33 in February 2018 and rolled over, breaking channel support in April. A May bounce off range support near $105 has now reached new resistance, while the monthly stochastics oscillator just crossed into the first sell cycle since July 2017.

The $115 level marks the line in the sand in this two-sided pattern, with a buying spike above that level opening the door to a third test at range resistance. On-balance volume (OBV) has taken a major hit since February, dropping in a straight line to the lowest low since the start of 2018. The indicator has barely budged during the May bounce, raising the odds that aggressive sellers will return in the coming sessions. (For more, see: Why Big Bank Stocks Are About to Crumble.)

Bank of America Corporation (BAC) stock bounced to $19.86 in 2010 following a bear market decline to a multi-decade low in the single digits. It finally broke out above that level following the presidential election, surging to an eight-year high at $25.80 in March 2017. The stock cleared that barrier in October and rallied into the low $30s, where sellers returned in January 2018. Two breakout attempts into March failed, generating a reversal that landed on the February low in early April.

The stock has traded in a relatively narrow range since that time, with sellers repelling attempts to mount the broken 50-day exponential moving average (EMA). It has now reached this barrier for the third time in four weeks, after a quick decline that found support at the 200-day EMA near $28.50. The March 22 gap between $31.50 and $32 could mark a more potent barrier in this battle between bulls and bears, with a reversal generating a test at the May low while a breakout should reach the January high.

[Learn more about recognizing chart patterns and developing your trading strategy in Chapter 5 of the Technical Analysis course on the Investopedia Academy.]

Citigroup Inc. (C) is still trading nearly 500 points below the 2007 peak as a result of massive dilution from a one-for-ten reverse split needed to keep the bank afloat after the economic collapse. The stock got stuck in the low $50s at the start of the decade, finally mounting that barrier in December 2016 and entering an uptrend that stalled just above $60 in the first quarter of 2016.

Price action then eased into a rising channel, posting a new high in June and gaining ground at a rapid pace into January 2018's nine-year high at $80.70. The subsequent decline broke channel support in March, dropping the stock into support at the 200-day EMA. A May test at the low found willing buyers, with the current uptick now testing 50-day EMA resistance. A rally above $73.38 should ease technical damage, while channel resistance now aligns with the 2018 high. (See also: Top 4 Bank Stocks for 2018.)

The Bottom Line

Big commercial banks have bounced into resistance after bearish April action and could turn lower in the coming weeks, rewarding targeted short sales. (For additional reading, check out: Why These 4 Bank Stocks Are a Bargain.)

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