Two small-cap PSU banks set for a leap?

The big picture: Nifty PSU Bank index rally

The Nifty PSU Bank index, a key benchmark for public sector banks in India, has experienced a dramatic trajectory since mid-2022. The turning point came in July 2022, when the index crossed its 200-Day Simple Moving Average (SMA) at approximately 2,700, signalling the start of a powerful rally. Over the next two years, the index soared by an impressive 240%, reaching a peak of 8,050 by June.

However, following the 2024 Indian general elections, the index faced a sharp correction, dropping 23% to a low of 6,160 and breaching its 200DMA. This downturn, while short-lived, set the stage for an intriguing technical development.

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Currently, the Nifty PSU Bank index has formed a double bottom at the 6,160 level—a bullish reversal pattern that occurs when an asset hits a low, rebounds, retests the same level, and then reverses upward. This pattern is often a precursor to sustained upward momentum.

Adding to the optimism, the index has reclaimed its 200DMA, reinforcing a positive technical structure that suggests the broader bullish trend may be resuming. Furthermore, a bullish divergence on the 14-period Relative Strength Index (RSI) indicates potential upward momentum.

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If the index holds above the critical 6,900–7,000 zone, it could sustain its outperformance. This scenario would likely benefit smaller PSU banks like UCO Bank and Central Bank of India, which are already showing promising setups and could capitalize on the broader sector recovery.

1. UCO Bank

UCO Bank has emerged as a standout performer among small-cap PSU banks, with its chart setup pointing to further upside potential.

In August 2023, the stock achieved a significant technical milestone by breaking above the ₹35 level on the weekly chart—a level it hadn’t breached since 2016. This breakout signalled the start of a strong uptrend, propelling the stock to double its value, reaching ₹70 within just 20 weeks—a remarkable 100% return.

After this sharp rally, profit booking brought the stock back to the ₹40 level, a critical support zone. On the daily chart, this correction from ₹70 to ₹40 formed a falling channel, a continuation pattern that often precedes further upward momentum. While the stock briefly dipped below its 200-day moving average (DMA), it quickly recovered, demonstrating underlying strength.

Now, as UCO Bank approaches the breakout level again, increasing trading volumes add weight to the potential for another upward breakout. Combined with strong relative strength compared to broader indices, the stock appears well-positioned for medium-term gains.

A sustained move above ₹70 would confirm the breakout, offering traders a clear signal to act.

2. Central Bank of India

Central Bank of India has been drawing attention for its breakout formation and strong price action in recent months, making it a stock to watch in the small-cap PSU banking space.

The stock broke above the ₹50– ₹55 range for the first time since 2019, forming an ascending triangle pattern on the weekly chart. This bullish continuation pattern signals the potential for long-term upside.

Following its rally to ₹77, the stock corrected to ₹49. However, low trading volumes during this phase indicated weak selling pressure—a positive sign, as it suggests a lack of conviction among sellers.

After testing support levels, the stock has started to rebound, with increasing volumes pointing to renewed buying interest. Adding to this optimism, a bullish harami pattern has emerged, further suggesting the likelihood of a reversal.

From a technical perspective, the 14-period Relative Strength Index (RSI) remains firmly in the bullish zone, reflecting strong buyer momentum. The daily chart complements the weekly setup, showcasing an ascending triangle formation and a higher high, higher low structure.

For more such analysis, read Profit Pulse.

With bullish indicators across multiple timeframes, Central Bank of India appears well-positioned for further upside in the near term.

Bullish outlook for small-cap PSU banks

The recent CRR reduction by the Reserve Bank of India in its latest Monetary Policy Committee meeting has set the stage for a positive ripple effect across the banking sector.

Read this | RBI cuts banks’ reserve requirements, a precursor to policy rate easing

Small-cap PSU banks, in particular, appear poised for a significant breakthrough. The Nifty PSU Bank index has reclaimed its 200-day moving average (DMA) and formed a double-bottom pattern—both strong indicators of a potential bullish trend. If the index sustains above the critical 6,900–7,000 level, the sector could witness the next phase of its rally.

Stocks like UCO Bank and Central Bank of India, backed by promising technical setups, are well-positioned to lead this upward momentum, offering compelling opportunities in the small-cap PSU banking space.

Disclaimer: This article aims to share interesting charts, data points, and thought-provoking opinions. It is NOT a recommendation. Before making any investment decisions, readers are strongly advised to consult their financial advisor. The content is strictly for educational purposes only.

About the author: Kiran Jani brings over 15 years of experience as a trader and technical analyst in India’s financial markets. A recognized market expert, he is a familiar face on business channels and has previously worked with Asit C. Mehta, Kotak Commodities, and Axis Securities. Currently, Jani serves as the Head of the Technical and Derivative Research Desk at Jainam Broking Ltd.

Disclosure: The writer and their dependents do not hold the stocks discussed in this article. However, clients of Jainam Broking Ltd may or may not own these securities.