[Premium] A Clear Inflection Point For Public Sector Banks

First let's start with the chart that sparked this post. The Equally-Weighted Nifty PSU Bank Index briefly undercut its 2009 lows and quickly reclaimed it, confirming both a failed breakdown and bullish momentum divergence.

This suggests to us that downside pressure is waning in the sector and upside participation is going to expand. If there was going to be a long-term bottom anywhere, here would be a very logical place for that to occur.

Click on chart to enlarge view.

When we look at the index components, we see a very similar picture...broken stocks that are seeing momentum improve as they approach our downside price targets and support. Let's look at the list.

Here's Bank of Baroda reclaiming 90 as momentum diverges positively. As long as prices are above that level, we'd much rather be erring on the long side and looking for mean reversion towards 122.

Bank of India met our downside target near 59 and has stabilized. It's messy, but if prices can close above 72 then they're potential for mean reversion towards 100.

Bank of Maharashtra reclaimed 10.50 as momentum stays out of oversold territory.

Canara Bank held support at 183 as momentum stays of oversold territory.

Central Bank of India confirmed a small failed breakdown but needs to get back above 28 to confirm a longer-term one.

Edelweiss Financial Services looks good as long as prices are above long-term support at 81.

IDFC Limited is struggling to gain traction, but if prices can get above 35 then we'd rather be long than short.

IFCI Ltd. reclaimed 7.50, opening up the potential for some mean reversion towards 12.

Indiabulls Housing Finance Ltd. held support at 180.

Indian Overseas Bank is attempting to reclaim support at 11.

Karnataka Bank is back above 76, opening up the potential for a move towards 103.

Karur Vysa Bank looks to be stabilizing above 55.00.

Punjab National Bank recovered after briefly making new all-time lows. Prices need to close back above 72 from a risk management perspective, but there's no reason to be short if above their recent lows.

RBL Bank Ltd. if back above 270.

Repco Home Finance is stabilizing the above support at 290 after briefly undercutting it.

South India Bank is turning higher after making new marginal lows last month. It's in no-man's land, but that doesn't mean it can't mean revert higher for a bit.

Big boy State Bank of India is 33% of the sector and remains a hot mess, but one positive is that momentum did not get oversold following its failed breakout and sharp correction.

Syndicate Bank met our downside target of 25 and has begun to stabilize.

UCO Bank is attempting to reclaim support at 15.50.

Union Bank of India met our downside target of 54 and is trying to stabilize.

The reason we went through all of those charts is not because they're all great trading opportunities, but instead to show that the majority of stocks in the sector are all experiencing similar conditions. They've either tested and confirmed support or are approaching it as momentum diverges.

The failed breakdown and bullish divergence setup can be a powerful one, so from that perspective, we'd much rather be erring on the long side of this sector and looking for reversion to the upside. Whether these are long-term bottoms or not will only be available in hindsight, but we can all agree that from a reward/risk perspective the bias has shifted to the long side.

Now we watch to see if these stocks can build on their short-term price and momentum improvements and lay the foundation of a long-term bottom.

Or they could all roll over and fail, but with our bullish stance towards equities, we're betting on rotation into weaker sectors like this that haven't participated to the upside.

There are several charts that look like this in other sectors so we'll outline those in another post in the next day or two.

Thanks for reading and please let us know if you have any questions.

Allstarcharts Team