Be Cautious While Trading Banking Stocks

Oct 20, 2021

Brijesh Bhatia, Research analyst

Banking stocks have been underperforming the Nifty for some time.

The Bank Nifty has been unable to take out key resistance levels on the charts. I believe this should be seen as a cautious sign.

It's possible these stocks could break out in the future with strong bullish momentum but if that doesn't happen, there is a serious downside risk that you should know about.

Watch the video for the details.

Let me know what you think about trading banking stocks. I would love to hear from you.

Hello viewers. Welcome to the Fast Profits Daily. Myself Brijesh Bhatia.

Since the market broke out at around June and July consolidation, there is no look back. Since start of August, we have seen the market, nearly 2.5 months, markets have been on a roll from around 16,000 levels now, now to around 18,500 levels, and it's been trending higher and higher.

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It's largely led by, I would say, Reliance, IT, and one sector which is hugely underperforming since February 2021, the banking space or Bank Nifty.

Though in the recent times we have seen Bank Nifty hitting all time high from around 40,000 levels but we think that it is a sign of cautious looking at the technical structure. First, let's look at the ratio chart of Bank Nifty over the Nifty over here.


So if we look at the momentum since highs of around February 2021, it's been going down and down. It means that the ratio chart over here is going down. It means that Bank Nifty is underperforming against the Nifty. If the ratio goes higher, the Bank Nifty outperforms, but in this case, since end of February, this ratio has been going lower and lower.

If you look at the green and red lines over here, the previous supports which were where those lows were made have been broken on the consecutive levels now.

This is a sign of cautious for me that in case the markets are in too overbought territory, considering the momentum on RSI and the markets take a U-turn over here, the Bank Nifty, which is underperforming or is the laggard, will be the will be hard hitting on the downside.


If you look at the weekly chart of Bank Nifty over here, there is a bearish harmonic butterfly pattern forming over here. Now the harmonics are basically reversal in nature, calculated using the multiple Fibonacci retracements and projections.

If I just look at the reversal it's around 39,950-40,000 zone and market have tested those levels, went lower in yesterday's session, came back very, very strongly, but yes, still 40,000 is being held as a resistance zone.

Again, this is a weekly chart on a larger timeframe. This pattern is panning out. Though we will wait for a weekly close on how this pattern forms but if you look at the structure 40,400 is the negate level for the pattern over here.


If I look at the daily chart, so let's look at the slightly lower down and look and look at the daily chart, the recent rally has been in the rising channel structure, and now, they look at the orange lines over here, the rising channel has been formed. Prices are resisting around this rising channel.

If you look at that black parallel lines, the gap area, which it has formed at the start of the week, will be very, very crucial to watch, the 39,375-39,560 zone. It's very, very crucial. Though in yesterday's session, we went to around test those gaps levels, we came back on the higher levels again.

So as a pattern on the weekly chart, I would slightly wait over here as a conformation of the break below 39,300 levels or any close on a daily basis as well. Below 39,300 levels, the bearish harmonic structure will be conformed and we might see the bearish momentum continuing on the down side.

Again remember, Bank Nifty is underperforming against the Nifty on a larger scale since February 2021 and again, the momentum if you look at the markets reverse, the weakness, the weaking sector or the weaking stocks are the first to fall. So this is very, very crucial over here to keep in mind that the Bank Nifty has formed a bearish structure over here.


Now if I go onto the adding the RSI over here, if you look at the lower panel of RSI, when the RSI tests 80 on the daily chart, either the Bank Nifty bullish momentum takes a pause or we see a retracement on the downside. But if I just again as a confirmation of that gap area of around 39,300 will be very, very crucial to confirm this pattern.

Any move above 40,500 will negate the structure though it's 40,400, I'm just keeping a 100 points buffer being a volatile index. So 40,500 in case we breach on the higher side, the pattern will negate but 39,300, any close below this level on the daily basis, will be a confirmation that the short-term top can be made into the Bank Nifty, and we might see lower levels. So this is a sign of cautious and keep this in mind. 39,300 level is very, very important for Bank Nifty from here on, because then gap area is very, very crucial.

Again, if you look at the Nifty, five consecutive gap up openings is witnessed into the momentum. We tested around 18,400 levels, came back very, very strongly, but it is very, very important that on Bank Nifty 39,300 on a close basis is very crucial to keep a watch on.

Again, I repeat, it has been underperforming. So when the bearish momentum starts, or the profit booking starts, the first sector to get hit is the underperformer sector and banking is one of the laggards into the recent momentum, right from a couple of months where Nifty has gone from 16,000 to 18,500 Bank Nifty has not contributed that amount of move, which Nifty has done.

So as a sign of cautious keep a watch and Bank Nifty as a cautious sign. Either 40,500 or 39,300 will be very, very crucial from current point of view on the Bank Nifty.

Signing off. Brijesh Bhatia.

Warm regards,

Brijesh Bhatia
Brijesh Bhatia
Research Analyst, Fast Profit Report
Equitymaster Agora Research Private Limited (Research Analyst)

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