Fading The Bounce In Public Sector Banks

First, let's start off with Bank of India to illustrate the type of behavior we're seeing across many stocks in this sector. Below is a weekly chart showing prices in a clearly defined structural downtrend, however, just last week prices slightly undercut their 2016 lows and quickly reversed higher. This confirmed a failed breakdown, as well as the bullish momentum divergence that has been developing. This defines the downside risk extremely well and with prices 50% + below their next potential resistance level, the reward/risk has certainly shifted in favor of the bulls.

Click on chart to enlarge view.

With that said, the daily chart paints a picture that's much less clear. We see the same failed breakdown below the 2016 lows, but there is no bullish divergence in momentum and there are several potential areas of resistance not far from current prices.

Ideally we'd like to see the two timeframes line up with the same bullish conditions, but unfortunately we're not seeing that in many of these names. With that said, let's take a look at the sector index itself on an absolute and relative basis to see if there's any sort of edge there.

On an absolute basis the Nifty PSU Bank Index has been chopping around former support near 2,825-2,830 without much direction since March. In addition to the lack of short-term direction, the intermediate/long-term trend is sideways as well, with prices sitting at the same level they were at two years ago.

Although the index itself has a more neutral feel to it on an absolute basis, we know from analyzing the mid and small-cap banks not represented in this large-cap index that there are a lot more bearish charts in this sector than the bullish or neutral ones.

Additionally, despite the benefit of being a large-cap index, it's still not been able to buck its long-term downtrend relative to the broader Nifty 500 and looks to be headed for new lows.

The Bottom Line: All of these factors suggest that despite the short-term bottom, Public Sector Banks are still a sector of the market we want to be fading strength in rather than buying weakness. Sticking with the trends of small and mid-cap under-performance, we want to focus our attention in those market-cap segments. We discussed several short setups in this sector in this weekend's mid-cap and small-cap posts for Premium Members, so I'd encourage you to check them out if you haven't.

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

Allstarcharts Team