[India Chart of The Week] Sun Pharma A Leading Indicator?

JC Parets
August 3, 2018

Most Nifty Indexes' largest components have a very large weighting on their performance, and Nifty Pharma is no exception. Sun Pharmaceuticals represents roughly a quarter of the index, so today we're going to look at it's role as a potential leading indicator for the rest of the sector.

Below is a daily line chart of the Nifty Pharma Index overlayed with Sun Pharmaceuticals. What we see from this relationship is that Sun Pharma generally leads the index, so when it's showing relative strength a move higher is likely, and when it's showing relative weakness then a move lower is likely. The two rarely separate from each other for long.

Why this is relevant to us now is because in May when the index undercut its August 2017 lows, Sun Pharmaceuticals actually held those lows and has been showing relative strength ever since. With history as our guide, this suggests that we may want to be looking for a move to the upside in both Sun Pharmaceuticals and the sector as a whole.

For some additional context, here is a daily chart of Sun Pharma covering the last 3 years. In June prices broke above the downtrend line from the 2015 highs and have been consolidating ever since to allow the 200-day moving average to flatten out and begin rising. This is exactly the type of action you want to see in a stock when it's bottoming, and if it's bottoming then the sector is likely not far behind. A move above 597 targets 726.

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If Cipla is above 630 we want to be long and taking profits near 745.

If Divi's Labs can get above 1,225 we want to be buying that breakout and taking profits just above 1,700.

Dr Reddy's Labs successfully retested its breakout above the 2016-2018 downtrend line, so we want to be long if it's above 2,125 and taking profits near 2,850.

Glenmark Pharmaceuticals successfully cleared the downtrend line from it's July 2017 highs, so we want to be long above 600 with a target of 830.

Lupin Ltd. also cleared and successfully retested its downtrend line, so we want to be long if prices are above 783 with an upside price target of 1,255.

If Merck can get back above 2,570 we want to be long and looking to take profits near 3,825.

Primal Enterprise is resolving its recent range higher. If prices are above 2,760 we can be long with a price target of 3,060.

Pfizer Ltd. finally broke out, so if prices are above 2,605 we want to be long with an upside target of 3,260.

Sanofi India Ltd. hit our secondary target of 6,011, but if it can get back that it becomes our new risk management level with a target of 7,340.

Torrent Pharma looks like it's headed back toward all-time highs. If price are above 1,465 we want to be buying weakness with a target of 1,690.

Unichem Labs is a potential mean reversion candidate if it can get back above 238.50. If it's above that level we can be long with a target of 285, but below 238.50 a neutral approach is best.

Throughout this year the conditions in the Pharmaceutical sector have shifted from bearish, to neutral, and are now becoming more bullish. I think Sun Pharmaceuticals is going to be the catalyst for the sector to move higher as well, and these are some of the ways to take advantage of it.

As always, we know our levels where we are wrong and remain open-minded about the thesis as new data comes in. For now though, it looks like we'd rather be long Pharma as a group than short.

If you have questions about anything discussed here or other Pharma stocks not covered, send us your question here.

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