Pharma's Trend Looks Ready To Accelerate Higher

JC Parets
January 20, 2020

Roughly 2 months ago we outlined why there was potential for strength and outperformance from the Nifty Pharma sector and its components.

We've gotten some nice moves since then and given the rotation we're seeing in other areas of the market like Consumer Goods and Technology, the charts are suggesting Pharma stocks are getting ready to accelerate to the upside.

Here's the Nifty Pharma Index, which confirmed a failed breakdown and bullish momentum divergence by closing back above support near 8,000. That defined our risk on the long side and skewed the reward/risk very much in our favor. It's worked well so far and we're now seeing prices accelerate off support and towards our 10,300 target.

Click on chart to enlarge view.

Here's the Nifty Pharma vs Nifty 500 ratio which met its downside target in November as momentum diverged, signaling to us that the underperformance from Pharma was likely over and that we needed to be getting long and potentially overweighting this sector.

Here's a look at Sun Pharma, which is about 1/4 of the index's weighting. It's finally stabilized above support and looks ready to move higher towards resistance at 535. For risk management purposes, we want to remain long if prices are above the recent pivot low of 420. Below that, things get messy.

Pharmaceutical stocks are likely to be on the move in the coming weeks and months. Our risk is very well-defined in the sector index, its largest component, and the stocks listed below.

Here's AstraZeneca Pharma India. We want to be buying this pullback as the longer-term breakout and uptrend remains intact as long as prices are above 2,350. If we're above that level then we want to be long with a target near 3,485.

We're also buying this pullback in Pfizer Ltd. As long as prices are above 3,770 then we can be long with a price target near 5,830.

Buying the pullback in Sanofi India Ltd. also makes sense. As long as prices are above 6,550, then we can be long with a target near 8,220.

Next are fresh breakouts we want to be buying...starting with Torrent Pharma. As long as the stock is above 1,950 then we want to be long with a target near 2,450.

Dr. Reddy's Labs has decisively broken above support/resistance at 2,800. We want to be buying this breakout and be looking for a target near 4,400.

Here's Divi's Laboratories accelerating to the upside. As long as prices are above 1,770 then we can own the stock with a target near 2,750.

Ajanta Pharma recently confirmed a bearish to bullish trend reversal, so as long as prices are above 1,075 then we can be long with targets near 1,320 and 1,625.

From our perspective, these are the most attractive reward/risk setups on the Pharmaceutical sector at current levels. Some of the setups we've outlined in the Trade Ideas Page are already well on their way to their price objectives and not offering a good entry here.

It's possible we're wrong about this thesis, but based on the money flowing into these stocks over the last few weeks and the attractive chart setups in many of the names, it's worth betting on some outperformance from the sector in the weeks and months ahead.

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

Allstarcharts Team

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