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.