In September we wrote about the Pharmaceuticals sector and its inability to gain traction due to relentless weakness in many components, particularly its largest component, Sun Pharmaceuticals.
Over the last two months the sector is basically flat, but several signs have emerged to suggest that we’re potentially at a major inflection point.
With that as our backdrop, let’s get into the charts.
First, let’s start with the weekly chart that we’ve used for the last few years to guide our decisions around Nifty Pharma. Since 2015 prices have been in a strong downtrend with momentum in a bearish range. After failing a breakout attempt in September 2018, prices drifted back toward the lows set a few months earlier.
Click on chart to enlarge view.
In September 2019 we saw prices break below their 2018 lows and support at the 61.8% retracement of its 2011-2015 rally, but momentum diverged positively and prices are now attempting to close back above support. A weekly close above 8,000 would confirm a failed breakdown and trap all of the sellers below support, creating an environment where there are a lot of natural buyers.
In addition to the improvements we’re seeing on an absolute basis, we’ve also seen the ratio of Nifty Pharma vs Nifty 500 reach its downside price objective and turn higher. This target was created by taking the 161.8% extension of the ratio’s 2014-2015 rally. Not only have prices bounced from this support level twice, but they’re also confirming the bullish momentum divergence that’s been building since the summer.
If Pharma stocks are going to bottom on a relative basis, this looks like a very logical place for it to happen.
These charts are very compelling and suggest we may be at a major inflection point in the Pharmaceuticals sector. As long as prices of Nifty Pharma are above 8,000 on a closing basis and the Nifty Pharma/Nifty 500 ratio is above its year-to-date lows, then our thesis is intact and the bias is to the upside.
Thanks for reading and let us know if you have any questions!