[Premium] Was That The Bottom In Nifty Pharma?

JC Parets
June 17, 2018

The roughly 15% rally in the Nifty Pharma Index that's occurred over the last four weeks has a lot of people asking "was that the bottom?". In an attempt to answer that question I'll be looking not only at the index itself, but at its 10 components as well.

Before we get into that though, I think it's important to understand how this index is constructed. Despite there being 35 pharmaceutical stocks in the Nifty 500, the Nifty Pharma Index only has ten stocks in it that make up roughly 80% of the industry's market capitalization. Situations like this are why we use equal-weighted indexes to get a better idea of what stocks in this industry are doing, as only looking at the cap-weighted index which is dominated by large-caps can mask the positive or negative relative performance of its mid and small-cap companies.

But today we're talking about the cap-weighted index performance, so let's get right into it.

Below is a weekly chart of the Nifty Pharma Index. As we can see, prices have been stuck a clearly defined downtrend channel since 2015 and remain so, however, in March of this year momentum began putting in a bullish divergence as prices retested its 2017 lows. In late May prices made a new low, meeting our downside price target near 8,000 and quickly reversing, confirming the bullish momentum divergence and failed breakdown.

Click on chart to enlarge view. 

Whether or not this is "the bottom" or simply "a bottom" within a downtrend remains to be seen, but what's clear is that the bias has shifted to the upside as long as prices are above 8,350. Our first upside objective is toward the top of the channel near 9,450 and then 10,300 if prices break above that level.

With that in mind, let's get into the individual components to see if they are confirming what we're seeing in the index. I'm going to use weekly charts here to focus on the big picture structural trend and avoid getting caught up in the day to day noise that daily charts can introduce.

The first stock on our list is Sun Pharmaceuticals, which makes up roughly a quarter of the index on its own. Like the Index, prices tested their 2017 lows, but held them as momentum diverged positively. Prices are now breaking out above former support/resistance and the downtrend line from its 2015 highs, which suggests we want to be long above 572 and taking profits at former support near 780.

Cipla Inc. briefly broke below the uptrend line from its 2011 lows several times this year, but quickly reversed higher. Prices are now trying to break above the downtrend line from its November highs, which would suggest we want to be long above 620 and taking profits at its all-time highs of 750.

Dr. Reddy's Labs is another name that met our downside price target and held its 2017 on a retest while momentum diverged positively. Prices broke above the downtrend line from its 2016 highs, which suggests we want to be long above 2,125 and taking profits near former support at 2,850.

Piramal Enterprises Ltd. is sitting below former support at 2,550, but a break above it would confirm a failed breakdown and likely be the catalyst for the stock to make new all-time highs. If we're above 2,550 we want to be long and taking profits near 3,000.

Lupin Ltd. met our downside price target near 725 in March, retested the lows in May as momentum diverged positively, and is now breaking out. As long as prices are above the December 2017 lows of 807 we want to be long and taking profits at former support near 1,255.

Aurobindo Pharma is a name where a neutral stance remains best despite the strong performance over the last two weeks. Structurally this stock remains in a range from 530 to 880, and we're toward the bottom of that range. If we can get above the April highs that'd likely suggest a retest of all-time highs is in the cards, but let's cross that bridge if/when we get to it. For now, I think there are better places to be.

Divi's Labs is another name where a neutral approach is best until we get an upside resolution to its recent range. If prices an get above the 2018 highs of 1,215 we want to be long and looking to take profits near 1,705.

Cadila Healthcare broke below its March lows and the uptrend line from its 2016 lows, but quickly reversed to confirm a failed breakdown and bullish momentum divergence. As long as prices are above the March lows of 363 we want to be long and taking profits near former support of 454.

Glenmark Pharmaceuticals is another name that exceeded our downside price target slightly and quickly reversed to confirm a failed breakdown and bullish momentum divergence. We want to be long above the December 2017 lows of 530 and looking to take profits at former support/resistance near 830.

The last stock on our list is Biocon, which has been trending higher to new all-time highs despite the strong downtrend in Pharma stocks as a group. Prices recently met our price target of 676 and are now consolidating to work off the bearish momentum divergence that's formed. We want to continue to watch this stock and be buying a breakout above 676 and taking profits near 1,050.

The Bottom Line: Nobody knows whether or not that was "the bottom" in Pharmaceutical stocks, but it was certainly a bottom. From our analysis of the index and the stocks that comprise it, we can see most of them met our downside price targets and are now reversing higher. There are far more stocks we want to be buying than selling and the failed breakdowns and bullish momentum divergences we saw in many of these names may be catalysts to propel them higher. Our risk management levels and price targets are very well-defined for each, so for now a bullish stance remains appropriate for this group.

Lastly, I'd like to point out that I've spoken about many setups in mid-cap and small-cap pharma names in previous posts linked here, here, and here, so check those out as well.

Thank you for reading and please let us know if you have any questions.

Allstarcharts Team

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