Bearish patterns detected in bank stocks

Chart watchers believe patterns can provide clues on which way stocks may be moving, and many are taking notice of the activity in bank stocks. 

In particular, they're often on the lookout for “engulfing candles,” which is when a security makes a higher high and a lower low in one session compared to the previous day. These are typically viewed as reversal patterns, with the potential to signal the end of either a rally or a selloff.

This pattern has appeared in several large financial companies this month, led by Bank of America (NYSE: BAC) on March 2, 10, and March 15. JPMorgan Chase (NYSE: JPM) and U.S. Bancorp (NYSE: USB) had them on March 8, along with Citigroup (NYSE: C) on March 15.

The engulfing candles come after stocks reached multiyear highs amid hopes that rising interest rates would fatten profits.

Bank of America 3-month chart

Source: OptionsHouse by E*TRADE

Many investors began 2017 looking for tighter monetary policy from the Federal Reserve. They got what they expected last week, but the market quickly faded the news and interest rates pushed lower. So what’s going on?

Events abroad may provide a clue because while optimism has run high in the United States, conditions across the Atlantic are better than many of the gloomiest predictions late last year. Deflation has gradually morphed into rising prices. Salaries are climbing and growth forecasts are moving north rather than south.1

That's come as a rude surprise to currency speculators, who began the year with big bets on the U.S. dollar rising.2 They've exited those positions as strategists gradually come to see the greenback as overvalued. 

“Our forecast reflects the scope for reserve currencies like the euro and yen to outperform the U.S. dollar,” JPMorgan economist Sally Auld told CNBC from Sydney on March 15.3 A Reuters survey this week shows others following, with Citi as the last major firm to remove a once-common prediction that the dollar would trade on a 1-for-1 basis against Europe’s common currency.4

VIX 3-month chart

Source: OptionsHouse by E*TRADE

This trend has been a boon for international stocks, with the S&P 100 Global Index outperforming the domestically focused S&P 500 by a wide margin this month. It’s hurt the banks because the weaker dollar is correlating into lower interest rates in the U.S. That’s lifting Treasury-bond prices, which some investors also consider a sign of fear.

Speaking of fear, the CBOE Market Volatility Index (yes, the dreaded VIX) made a lower low on Tuesday versus Monday, plus a higher high. In other words, another example of an engulfing candle near long-term lows. Does that mean volatility is now poised to reverse upward?  Some chart watchers may think so.  

1. Marketwatch: Eurozone inflation hits 2%, rises above ECB target. 3/2/17; RTT News: Eurozone Labor Cost Growth Improves in Q4. 3/20/17; RTT News: Germany's Economic Advisers Lift Growth Projection. 3/20/17.

2. RBC Capital Markets: IMM FX Positions: USD longs fall again. 2/3/17

3. Strength in US dollar to come off mid-2017. JPMorgan. 3/15/17

4. Reuters: Big banks back off calls for euro-dollar parity. 3/20/17