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Banks are at 'critical juncture.' Here's what to watch

Banks could face their next critical test, chart watcher says

Banks could be under pressure Friday after the Federal Reserve's stress test set off some warning flares.

The Fed said Thursday that banks would need to hold buybacks and dividends at their current level during the third quarter as it warned of banks' potentially getting close to their minimum capital levels in certain scenarios.  

Matt Maley, chief market strategist at Miller Tabak, said the charts indicate banks are at a crossroads.

"It's weird because I've been quite cautious on the group for two to three years now saying that they would underperform, but I've been trying to turn a little bit more constructive on the group in the last couple of months because they finally on a technical basis seem to be forming a bottom," Maley said on CNBC's "Trading Nation" on Thursday.

The KBE bank ETF, he says, hit lows in March before recovering to make a series of higher highs and higher lows. After hitting highs in June, the group has fallen back to form what Maley sees as a "head-and-shoulders pattern," a technical formation where a stock or ETF hits a high, a higher high and then a higher low roughly equal to the original high.

"It's a critical juncture. If they react negatively [to the stress tests] that neckline is going to be broken in a meaningful fashion and it's going to be quite negative. If it's a positive reaction and they bounce back and take out their June highs, it's going to be very, very bullish," said Maley.

In the same interview, John Petrides, portfolio manager at Tocqueville Asset Management, said investors are facing two fears when it comes to banks: Banks could be pressured by loan defaults and interest rates could hold lower for longer.

"Banks have a sensitivity to their net interest income based on where interest rates are, but I would say that a lot of that is priced into their stocks. Many of the large-cap money centers are trading at their book value or their price to tangible book value at a discount to their tangible book value. So I would say a lot of that is priced in," he said.

Bank of America, JPMorgan, Citigroup and Goldman Sachs are all sharply higher since their March lows — Citigroup is the best performer, up 64% from that mid-March bottom. Goldman was down 3% in Friday's premarket, and the others were also lower.