Chart of The Week: Has the Time Come for PSU Banks?

Fred McAllen, a great chartist and technical analyst have a famous saying:” it takes patience to wait for the trade and pattern to develop, for the opportunity to present itself. Let the market come to you, instead of chasing the market. Chart patterns are very accurate. They have proven their accuracy and predictability time and time again, but you have to wait for them to develop.”

And the larger is the time takes in the formation of chart, the longer and more ferocious the rally will be. It’s always better to wait for your high probability formation to form and wait like a tiger to pounce on it. That’s the way to catch the big trend. This is where the role of the time cycle comes into the picture.

PSU Banks seems to be in the same zone. Sharad Jhunjhunwala, a famous Gann Trader and time cycle exponent, says with confidence,” Le lo jitna ji me aaye, risk reward ka dhyan me rakhte hue and forget for 2 months.”

He is not wrong. However, if the ferocious rally indeed starts, it may not end soon as it will be a decadal breakout. We have tried to evaluate the PSU banks chart, and you will know why I am so bullish and optimistic about it.

To understand the big trend, it is always preferred to take a longer time frame on the chart. Therefore, we have taken a weekly timeframe.

Though I am not an accomplished chartist to be honest unlike Bharat Jhunjhunwala, Rishikesh Singh or Chetan Panchamia, but I’ll try to analyze it to the best of my abilities.

The idea to write this long blog post came only after watching Sharad Jhunjhunwala video. I realised many accomplished traders and investors are so bullish about PSU Banks. That means they can see something which ordinary and mortals like me cannot see. It’s only after a little bit of scrutiny, I figured out the reason for their consensus.  Let’s come straight to the point. Just see the chart of Nifty Bank PSU Chart.

From the start of 2012 to 2019, it traded in a range of 1900-3900. It attempted to break this range thrice and even broke it in May 2014, January 2015, and November 2017. However, even in the strong rally of the Modi wave, it could not sustain itself and fell in the range again.

During the Corona period in 2020, it even broke down the lower range of 2400-2500 it was trading and then breaking down the strongest support of 1900, it touched the level of 1000.

It later recovered to the original level. The point to understand here is despite private banks and other sectors not only recovered successfully and gave stupendous returns above the pre corona levels, it only managed to recover its initial level somehow.

If you see the chart shown below, it’s like a Cup and Handle pattern formation seems to have completed. That’s where it should be on your radar. Any sustained breakout with strong volume can push it above the resistance zone and propel it toward the next resistance of 3400-3500 as shown by the yellow line.

As of now, it is near the 2500 level. If the index increases 30-40%, individual stocks may double or triple. Heavyweights like SBI and BOB may not double, but smaller components can easily become multibagger.

• Canara Bank has already doubled in the last year.
• Indian Overseas Bank has more than doubled since December 2020
• Bank of Baroda has doubled from 41-84
• PNB has been a laggard, still, it has given a return of 40%.
• And the leader of this recovery has been SBI which has also more than doubled.

Though breakout is still to happen in the chart and it may consolidate near this level for some time. If you see the individual stocks, you have initial signs of the emerging future trend.

Risk-Reward Ratio

The downside risk here seems to be quite low at the 2250-2300 level which is 200-250 points from the current level, the upside potential is 800-900 points.  The risk-reward ratio is either 1:3 or 1:4 if you can hold it for some time.

“Despite chaos and uncertainty in the market, #PSUBanks seems to develop a good structure, which is good for both swing and positional play,” says Mohit Mehta, a professional trader.

In#MarketsWithMC, Jay Prakash opines that the bad days for PSU banks seems to be over as government seems to be serious finally. Setting up a “bad bank” to clean up NPAs is a step in the right direction.

Even RJ aka Rakesh Jhunjhunwala, the undisputed Badshah of Dalal Street, also seems to be bullish on #PSUBanks. He believes that the cycle is ripe for them and the valuation gap with private players will eventually narrow down. Keep this on your radar.