[Premium] Nifty Public Sector Bank Update

January 6, 2019

The Public Sector Bank Sector of the Indian Stock Market has struggled since late 2017, however, there are signs that many of these stocks are in the process of changing long-term trend.

The Nifty PSU Bank Index looks like a hot mess on all timeframes, but below we have the weekly chart showing its long-term range of 1,950 - 4,400. Currently prices are right smack in the middle of the range, attempting to firm up after making new marginal lows late last year.

Click on chart to enlarge view.

The State Bank of India, the index's largest component at a ~70% weighting, looks slightly better in that it's closer to the top of its long-term range. Also worth noting that momentum is in a bearish range. It's clear that the smaller components have been a drag on the index, leading it to look worse than State Bank of India.

The Equally-Weighted version of this index recently undercut its long-term support level and quickly reclaimed it, signaling a significant improvement in the performance of the other stocks in the sector.

Looking at all of the components, I'd bucket them into one of three categories.

The first kind successfully retested long-term support with momentum staying out of its bearish range. Prices are now back at a significant resistance level and need more time to consolidate for their long-term trend to reverse.

The daily chart for this kind of stock is encouraging. Prices are back above support and momentum has transitioned into a bullish range, but remain below a downward sloping 200-day moving average. These improvements suggest a change from a downtrend to a sideways trend, but more time is needed before a sustainable uptrend can develop. Given the mixed signals, we wouldn't want to be long or short just yet.

The second kind of stock is one that's basing at support, but is within a messy long-term range that's tough to trade and has about an equal risk/reward percent-wise whether long or short.

The daily chart of this stock looks like prices basing above support below a downward sloping 200-day moving average, with momentum in a bullish range. While a breakout above resistance is possible, it's not one we would be buying due to the other bearish characteristics of the chart. Due to the mixed signals, there isn't much conviction to be long or short just yet.

The third type has successfully tested long-term support as momentum diverged positively, causing prices to rally out of their short-term range. These bullish developments suggest we'd rather be buying weakness than selling strength as long as prices are above their recent lows.

On the daily chart we can see this change more clearly. Prices based at support for months as buyers stepped in to defend that level, eventually overwhelming sellers and pushing prices higher. Not only have prices cleared their short-term range, but they're back above what is now a flat 200-day moving average and momentum is in a bullish range.

While some digestion of these gains would be healthy, these bullish developments tell us that the stock has successfully transitioned from being one we wanted to sell strength in to one we'd rather be buying weakness in. In other words, the trend has successfully transitioned from down, to sideways, and now higher.

What the improvements in this sector on multiple timeframes tells us is that we are clearly no longer in an environment where we want to be short the sector or its components from any intermediate or long-term perspective. While the weekly and daily timeframes aren't fully in agreement for many names, we think they'll get there over time.

So in the meantime, what's the best course of action when we're getting mixed signals from the weekly and daily timefames of the same stock?

Patience.

If this truly is a long-term trend change, we'll have plenty of opportunity to take advantage of it without having to catch the exact top or bottom.

There aren't many elevated reward/risk opportunities today, but we'll be keeping an eye on this sector in the weeks ahead and will update you on potential trade ideas as they develop. For now, these three stocks appear to have the best reward/risk potential in the space.

Bank of Maharashtra needs time to work off this bearish momentum divergence and allow the 200-day to begin rising, but if prices can stay above 14.90 they can head higher toward 24.50 over the intermediate-term.

Punjab & Sind Bank is in a similar situation, with prices attempting to base above 31.40 after breaking out three weeks ago. As long as we're above that level, there's upside potential toward 45.25.

Canara Bank is in a similar boat, though momentum has yet to reach overbought conditions. If prices can stay above 271 and momentum confirms new highs in price, there's potential upside toward 345.