[Premium] Analyzing The Pharma Sector's Health

Here's the Nifty Pharma Index, which pulled back into its long-term range after breaking out and reaching our upside target near 10,800 late in the third quarter of 2018. More recently, prices have stabilized above 8,550 and have been grinding higher with momentum grinding lower. With prices near a flat 200-day the long-term trend is sideways, but prices look vulnerable to retest their lows in the near-term.

Click on chart to enlarge view.

Here's an overlay of the Equally-Weighted and Cap-Weighted Index, sitting in the middle of their range.

The more interesting perspective is the ratio of the Equally-Weighted vs Cap-Weighted Index, which has broken back below its early 2018 highs and is drifting lower as momentum gets oversold...signaling a deterioration in sector breadth. Fewer stocks participating to the upside.

Here's the sector's largest component, Sun Pharma, which rallied back above support but momentum never got overbought. If prices break back below 430, it signals the resumption of its long-term downtrend and likely drags the rest of the sector lower with it.

Other stocks like Biocon are seeing their consolidations resolve lower, rather than in the direction of their long-term trend. This is a problem.

Another example is Jubilant Life Sciences, which attempted a breakout weeks ago and quickly traded back toward the bottom of its 3-year range.

Sanofi India Ltd. also attempted a breakout and then quickly traded lower after being rejected at its 2018 highs.

Meanwhile Cadila Healthcare is another type of Pharma stock, which has been trending lower for a while and is now attempting to find support at the bottom of its range.

Unichem Labs is another good example of a stock that's been trending lower for a while and is now testing critical support.

Wockhardt Pharma is in a similar position.

Here's Strides Shasun Ltd. consolidating within a structural downtrend. Again, not a chart we want to be buying.

Even the strongest names like Divi's Labs is seeing prices grind higher as momentum diverges. This type of waning price action is what we like to look for at potential turning points, not a trend continuation.

Torrent Pharma is another name that was unable to continue higher after its breakout, now testing key support at 1,700.

Dr. Reddy's Labs finally broke out and looks to be one of the few stocks in the space with clearly defined risk on the long side. Above 2,775 the bias is higher toward 3,275, but if the rest of the sector continues breaks down then this will likely have trouble continuing higher.

Same goes for IPCA Labs, which has stalled after breaking out of a multi-year base. Again, if prices are above 905 then the bias is to the upside, however, if the other components of this sector are breaking down then it's unlikely this breakout is successful.

Price action in the Nifty Pharma Index remains a concern and indicates that a neutral/bearish perspective is best. At the Index level it's difficult to define our risk long or short, so the best reward/risk setups appear to be in individual names.

Overall though, in the vast majority of this sector's components the best strategy right now is patience until they develop a more attractive setup.

If you have to be long or short, then here are the names we like.

On the long side Dr. Reddy's Labs and IPCA Labs look to be the strongest.

On the short side Sun Pharma appears to be the cleanest short setup if/when it breaks back below 430.

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

Allstarcharts Team