The last few weeks have been quite volatile for the markets and Bank Nifty in particular has been an underperformer. The escalating Israel-Hamas war tensions, spike in the US 10year bond yields, and comments from the Fed that indicated that the interest rates may stay higher for longer-than-usual spooked the markets that led to equities showing corrective moves which also otherwise remain technically weak. 

In recent weeks, the financial markets have experienced significant volatility, with Bank Nifty emerging as an underperformer against the broader markets. These challenging market conditions, coupled with geopolitical tensions, have raised concerns for investors. A closer look at Bank Nifty’s technical indicators suggests that it may be prudent to maintain a highly stock-specific but largely underweight position on bank stocks and await a bullish reversal before considering reinvestment.

Taking a broader view of the market on a weekly chart, one significant development is the formation of a double-top pattern around the 46310-46350evel. This pattern has raised concerns as it indicates a potential trend reversal. Moreover, Bank Nifty recently breached a crucial support level at 43550, which had previously acted as resistance in May of this year. Last week, Bank Nifty established a notable support level in the range of 41850-42000, which had previously served as a resistance level in the preceding year. This transformation from resistance to support signifies an important shift in the technical dynamics of the index. 

In conjunction with other technical indicators, the Relative Strength Index (RSI), a prominent momentum gauge, has exhibited a concerning negative divergence. In July of this year, Bank Nifty recorded a higher peak at 46369 levels, while RSI concurrently registered a lower high. This divergence underscores a cautionary signal, suggesting a potential weakening of the current trend. In the previous week, the index also fell below its 50-week moving average, indicating a potential sustained weakness. These factors collectively suggest the index could be poised for a further downside move, potentially targeting levels around 41200.

Zooming in on the daily price chart, it becomes evident that the index has fallen below the 200-day moving average (MA), signaling a shift in the underlying trend toward bearish territory. In recent trading sessions, a significant technical development unfolded as the 50-day Moving Average (MA) crossed below the 100-day MA. This crossover occurred as the price encountered resistance around those levels before subsequently moving lower, amplifying the bearish sentiment and underscoring the index’s prevailing weakness. Although there was a pause in the downward movement, indicated by Friday’s closing, it is essential to recognize that this could be a temporary reprieve. 

A pullback is plausible and could provide an opportunity to reduce positions in banking stocks that have a significant impact on the index. The recent RSI movement out of the oversold zone supports the possibility of a pullback. This potential pullback may aim for the 200-day MA which presently stands at 43188 and the index may find resistance there.  The zone of  42500-43000, which also closely aligns with the 23.6% Fibonacci retracement levels from the entire fall from 46300 to 42100. 

Investment Strategy: Staying Underweight 

Given the current technical and geopolitical landscape, it is advisable to maintain an underweight position in banking stocks. The uncertain market conditions warrant a cautious approach. Investors who are overweight in these stocks should consider this pullback as an opportunity to rebalance their portfolios. 

Action to be taken 

The key question is when to consider reinvesting in banking stocks. There are two potential scenarios to watch for: 

1. Bullish Reversal Near 41200: Banking stocks could turn bullish once the downside target of the double top pattern is achieved, approximately at the 41200 level. Look for bullish reversal signs in both price action and technical indicators. 

2. Weekly Close Above 200-Day MA: Another potential entry point is when Bank Nifty closes above the 200-day MA, roughly around 43200 or 43100 on a weekly basis. This coincides with the 50-week MA, which can further validate the reversal. 

Stocks in Focus 

Some of the banking stocks that tend to move in sync with the benchmark index include HDFC Bank, SBI, Kotak Mahindra Bank, and Bandhan Bank. Keep a close eye on these stocks for signals related to the broader market’s health. 

Conversely, certain stocks in the Bank Nifty index have exhibited signs of outperformance, which may provide alternative investment opportunities. Notable names in this category include IndusInd Bank, Au Bank, and Axis Bank. 

In conclusion, along with the markets in general, Bank Nifty also currently faces challenges on both technical and geopolitical fronts. Investors are encouraged to maintain a prudent stance, staying underweight on banking stocks until clear signals of a bullish reversal emerge. The specific levels to watch for are the achievement of the double top downside target around 41200 OR a weekly close above the 200-day MA. Careful monitoring of individual banking stocks is crucial, as some may present unique opportunities for those who are nimble and well-informed.

– Foram Chheda, CMT