Over the past week or so, we've seen an upside reversal in many of the public sector bank stocks across the large-, mid-, and small-cap segments of the market. This has many wondering whether or not this is "the bottom" in this sector or if it's simply "a bottom" within the context of many structural downtrends. In this post, we'll take a look into the sector to see what the weight of evidence suggests might be the answer to this question.

First, let's start off with Bank of India Limited (BANKINDIA.BO) 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 more than 50% below their next potential resistance level, the reward/risk has certainly shifted in favor of the bulls. (See also: The Regulations That Govern Banking in India.)

Weekly technical chart showing the performance of Bank of India Limited (BANKINDIA.BO) stock

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.

Daily technical chart showing the performance of Bank of India Limited (BANKINDIA.BO) stock

[I show you how the analysis of support and resistance levels can generate profitable trading decisions in my Technical Analysis course on the Investopedia Academy, where I include interactive content and real-world examples to boost your trading skills.]

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 to 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.

Daily technical chart showing the performance of the Nifty PSU Bank Index

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, the Nifty PSU Bank Index has still not been able to buck its long-term downtrend relative to the broader Nifty 500 and looks to be headed for new lows.

Technical chart showing the performance of the Nifty PSU Bank Index vs. the broader Nifty 500

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 underperformance, 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 All Star Charts India Premium Members, so I'd encourage you to check them out if you haven't.

If you're not a Premium Member, you can start a 30-day risk-free trial to view those posts and other premium research, or consider joining our community by signing up for our "Free Chart of the Week".

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