The market is telling us that Pharma stocks need more time to correct before they’re ready for their next leg higher.
Below are a few charts explaining why and how we’re approaching the sector going forward.
First, let’s take a look at the daily chart of the Nifty Pharma Index. Prices are above a rising 200-day moving average and momentum remains in a bullish regime, but for 4 months prices have been correcting through time.
Click on chart to enlarge view.
With prices testing the lower end of this range, there’s risk that prices break support near 10,700 which would open up the potential for further downside towards 9,500.
And here’s Nifty Pharma on a relative basis, hitting multi-month lows as momentum gets oversold. A lot of this can be attributed to the pickup in banking stock performance that’s driving strength in the Nifty 100, but either way, new lows are not what we want to be seeing.
On top of that, we’ve been seeing fewer successful breakouts and more breakdowns in many individual components.
That’s less than encouraging.
Here’s Sanofi India Ltd. breaking its consolidation lower instead of higher.
And even big winners like Dr. Reddy’s Labs are correcting towards their key long-term levels, in this case, 4,300.
We’ve been pointing to this corrective period and have been taking a much more selective approach towards Pharma over the last few months.
The recent action and continued weakness does not change that thesis. If anything, it suggests being even more selective in what stocks we own, particularly as several of them break their risk management levels and brace for further downside.
Rotation is the name of the game, and right now, money continues to rotate out of Pharma stocks as a group. Expect volatility to continue in this space.
Thanks for reading and please let us know if you have any questions.