Bank of America Corporation (BAC) CEO Brian Moynihan tossed a grenade into the commercial banking sector's recovery efforts during a mid-week conference, telling investors and analysts that second quarter revenues from sales and trading would be flat compared with 2017 if business doesn't pick up in the final month of the quarter. The sobering news added to sector malaise that has generated returns of just 3% so far in 2018.

Regional banks have fared better, with the top regional bank sector fund gaining more than 8%. This divergence reveals a divide between weak business investment at the commercial houses and strong growth at the regionals, underpinned by higher interest rates and healthy consumer spending. Even so, both groups are struggling to clear January resistance levels, held down by trade tensions and the failure of tax cuts to generate major upticks in economic activity.

Investors hope trade tensions ease in the coming months, but that appears unlikely given recent saber-rattling by the Trump administration. Tariffs and trade wars have the power to stall the U.S. economy and end the multi-year bull market because retaliation is likely to reduce revenues at American companies with foreign sales. That long list includes automakers, farmers and equipment manufacturers. (See also: Goldman Sachs and Other Big Banks Break Down.)

The SPDR S&P Bank ETF (KBE) topped out at $60.41 in 2007 and plunged during the 2008 economic collapse, dropping to $8.90. The subsequent recovery wave stalled at the 50% sell-off retracement level in 2013, giving way to a multi-year consolidation that yielded a major breakout after the 2016 presidential election. The fund gained ground in two stair steps into January 2018 and reversed at the .786 retracement, where it has been grinding sideways for the past four months.

A March breakout attempt stalled at the January high in the lower $50s, reinforcing a rectangle pattern with support at $46.50. The lazy uptick between March and May ended mid-range more than a week ago, carving a shallow bear flag that signals limited buying interest. The fund just closed below the 50-day exponential moving average (EMA) for the first time since May 7 and could soon test the 200-day EMA for the second time this year.

 [Check out Chapter 5 of the Technical Analysis course on the Investopedia Academy to learn more about recognizing chart patterns and using them to implement your trading strategy.]

The .786 retracement has a well-earned reputation for printing lower highs within long-term uptrends, so the fund is sitting at a perfect price to enter a new downtrend. The monthly stochastics oscillator crossed into a bear cycle in January 2018 and still hasn't reached the oversold line. The weekly indicator just crossed over as well, with twin headwinds predicting relative weakness into the summer months.

On-balance volume (OBV) has been solid as a rock, breaking out with price in 2016 and posting a series of new highs. It added another new high in May at the same time that price was stalling mid-range, generating a bullish divergence that suggests buyers are still in charge. However, the bearish stochastics cycles insist that time is running out, warning committed bulls to step up soon or risk a major breakdown.

A breakout will finally open the door to the 100% retracement level, or the 2007 high, completing the long round trip. On the flip side, failure to hold support in the mid-$40s will set off major sell signals that favor a slide into the upper $30s and a major test of the 2016 breakout level. There's little to be gained from long or short positions while this standoff unfolds, so the sidelines look like the right place to be at this time. (For more, see: Why Big Bank Stocks Face More Steep Declines.)

The Bottom Line

The commercial banking sector continues to struggle, with the primary sector fund adding just two points so far this year. Volume analysis reveals that bulls are still in charge, but adverse relative strength cycles are now in place, raising the odds for another trip to January lows. (For additional reading, check out: Morgan Stanley Sees Steepest Fall in Two Years.)

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