Time to be Bullish on PSU Banks?

Nifty PSU Bank Index – 2,649

The PSU Bank index first attracted our attention in mid-May 2021, when it was trading at around 2,200. At that time, we released a summarized report on this index as well as on the top five stocks in the sector. We can now review the performance of this sector from May 2021 to date.
This index has advanced from the 2,200 level to 2,600 and gained around 20% between May 18, 2021 and October 12, 2021 (today). Apart from this, performances of stocks mentioned in the previous report dated May 18, 2021 are as follows:
 

 
At this time, Nifty PSU Bank is another sector that has grabbed the attention of investors. Leading stocks in this particular space are doing well and are also attractive from an investment perspective.
 
The Nifty PSU Bank index has historically underperformed, but is now gradually gaining momentum. It has had a fresh breakout on the weekly and monthly charts. After touching a high at 2,580 in the first week of July, it went into correction and fell to the2,204 levels. However, hopes of privatization, attractive valuations, under ownership, and acceleration in the 10-year bond yield are factors that have lifted sentiment in this particular space.
 
 

 
 
 

 
Currently, from the perspective of technical analysis, the multi-timeframe chart of this sectoral index indicates the following:
 
● This sectoral index has retraced almost 50% of the fall that happened between November 2017 and May 2020, now gradually gaining momentum on the higher timeframe charts.
 
● Further, it has had a fresh breakout above the downward sloping trendline connecting the closes of November 2017 and May 2020 on the weekly and monthly charts. Simultaneously, it has formed a cup-with-handle price pattern on the weekly chart and broken out above this pattern.
 
● Apart from the price structure, momentum indicator RSI on the weekly chart is trending in a bullish range and has had a trendline breakout on the monthly chart connecting the high of 2014 to the high of 2017. Another indicator, MACD, on higher time frame charts (weekly and monthly) is also trending upward above the central line, indicating positivity.
 
● An analysis of the ratio chart, that is, Nifty PSU Bank index versus Nifty50, shows the former has now moved above its 200-DMA with a downward sloping trendline on the weekly chart.
 
● It is trending above all key moving averages on all time frame charts (daily, weekly, and monthly). Currently, the index is placed around 6.79% and 11.52% above its 50- and 200-DMA, respectively. Further, the study of the weekly chart suggests this sectoral index has reclaimed its 200-WMA in the last week of September 2021 and is still trending above that line, which heralds a strong bullish rally in the next few weeks and months.
 
Summary: Nifty PSU Bank index has now had an upside breakout after eight months of consolidation on above average volume. Hence, we expect sustainable trading above 2,500–2,550 levels may lead this index toward the 3,200 - 3,400 mark. However, on the flip side, failure to hold above the 2,500 level may turn the action volatile and choppy.
 
A further analysis of sectoral components (stocks) indicates bullish trends. The stocks with the highest weightage in this sectoral index – such as like SBIN, BANKBARODA, PNB, CANBK, INDIAN BANK and UNIONBANK – are showing a bullish trend. We expect all these stocks may generate positive returns in the upcoming weeks and months.