[Premium] The Best Opportunities In India's Pharma Sector

First, let's start with the Nifty Pharma Index on an absolute basis. Prices recently confirmed a bearish to bullish reversal by closing back above the downtrend line from its 2015 highs and its April 2019 highs at 9,500. After a 65% rally off its March lows, some consolidation should be expected between 9,500 and 10,700.

Click on chart to enlarge view.

On a relative basis, the Nifty Pharma Index vs Nifty 100 ratio continues to struggle with former support as momentum diverges negatively. This signals to us that some consolidation is likely here before its longer-term trend of outperformance continues.

In addition to what's happening at the index level, many individual stocks in the sector are at key areas of resistance  in the short-term.

Here's Cipla Ltd. failing at resistance near 670 while momentum diverges negatively.

J.B. Chemicals & Pharma has been marching to the upside and is at risk of confirming a failed breakout and bearish momentum divergence. A close below 670 would signal the start of a correction in the stock.

Alembic Pharma has gone parabolic off its March lows and recently broke out to new all-time highs. Upside momentum is waning and the stock is at risk of confirming a failed breakout if it moves back below 795.

While we're positive on the sector and many of these stocks longer-term, we think that near-term risks are elevated and better buying opportunities await us. Given that view, we want to outline the stocks in the sector that stand out as leaders.

You'll notice in our analysis that we're looking at each security on an absolute basis, primarily to identify risk management levels, but also on a relative basis, to identify who the leaders are and where the big money is flowing in the sector.

Stocks with absolute and relative trends that are pointing in the same direction are where we want to be focusing our attention. Additionally, it's important to note that improving or weakening relative strength can be a leading indicator for trend changes on an absolute basis.

Potential trend changes underway: Own them only above their risk management level.

The first category of Pharma stocks we want to look at is big winners who are now breaking down on a relative basis. This waning relative performance is signaling something may be wrong here and that money is potentially flowing out of these past leaders and into emerging ones.

As a result, the way we want to approach these stocks is by owning them but keeping them on a tight leash. For now, their absolute trends remain intact so there's no reason to get out of them immediately. There's still time for their relative trend to stabilize and resume higher, but if their risk management levels break on an absolute basis then we get confirmation that something is wrong and we need to step aside.

Pfizer India is a great example of this. We've liked the stock as long as prices are above 3,800, but it has not been able to make a sustainable move to the upside towards our next objective of 5,900. Instead, it has chopped around while the rest of the sector continues to perform well. Also, notice how its RSI value has been putting in lower highs despite higher highs in price.

Here's the relative chart putting in a massive failed breakout above its 2006 highs. For all intents and purposes, its relative uptrend is now over until the ratio gets back above those former highs.

Abbott India Ltd. is in a similar predicament. Prices are consolidating above our former price objective as momentum works off a bearish momentum divergence. A move below 16,300 would confirm that waning momentum reading and a failed breakout.

On a relative basis, its uptrend is still intact but is correcting to the downside. It's only a slight change of character, but something to keep an eye on.

Here's Divi's Labs consolidating above 2,200 as momentum diverges negatively.

And here's the stock on a relative basis breaking its uptrend line and continuing to correct.

IPCA Labs is in a similar situation, but instead of consolidating above our price objective, it's consolidating below it. Here the risk management is much easier because there's no reason to be long this stock until it clears 1,730 on the upside, as below that there's downside risk towards 1,220.

Here's the stock on a relative basis breaking its uptrend line and continuing to correct on the downside.

Bearish to bullish trend reversals: buy any weakness back towards their breakout area.

The next category of stocks we want to be focused on is bearish to bullish trend reversals. These are stocks that had previously underperformed and are now turning a corner on both an absolute and relative basis.

Let's start with Dishman Carbogen Amics, which recently confirmed a failed breakdown and bullish momentum divergence. This trend reversal remains intact if prices are above 64, so any weakness towards that level should be viewed as a buying opportunity. Ultimately, this stock could move back to the top of its long-term range near 375.

On a relative basis, the stock has also confirmed a failed breakdown and bullish momentum divergence. As long as prices are above long-term support near 0.0075, then the bias is higher and we'd expect continued outperformance from the stock.

Sun Pharma Advanced is back above long-term support/resistance near 105. As long as prices are above that level, then this failed breakdown and bullish momentum divergence remains intact and our target is up near 255. Any weakness in the stock should be viewed as a buying opportunity.

On a relative basis, the stock has stabilized above long-term support and is attempting to move higher. A break above resistance near 0.016 (outlined in red) would add extra fuel to the fire and propel the ratio higher.

Cadila Healthcare Ltd. has broken back above support/resistance near 295, opening up the potential for it to move back towards its 2017 highs of 545. This trend reversal remains intact above 295, so any weakness towards that level can be bought.

On a relative basis, prices are trying to stay above an important support/resistance level near 0.035. If prices can stay above that level and continue higher, that would be a big positive longer-term.

Ajanta Pharma has spent the last 2.5 years basing below 1,550 and is now bumping up against that level again. The more times a level is tested, the more likely it is to break, and a break above 1,550 would help confirm the start of a new long-term uptrend that targets its all-time highs near 2,125.

The stock made new all-time highs on a relative basis but quickly failed. Overall though, this base remains constructive and a breakout to new all-time highs would be a very positive development.

Continuing leaders: buy pullbacks to their breakout areas or fresh breakouts if currently below.

The last category of stocks is those showing strong absolute and relative performance that we want to be buying when the risk becomes well-defined again.

Here's AstraZeneca Pharma India, which we've liked since its long-term base breakout above 2,400. Now that prices are meeting our first objective near 3,500, that becomes our new risk management level. We only want to own the stock above 3,500, with a target near 5,250.

On a relative basis the stock looks poised to break out above long-term resistance and test its all-time highs set in 2012.

Biocon recently broke out to new all-time highs. Our risk is very well-defined against 360, so we only want to be long above that level with a target near 577.

On a relative basis, the stock continues to consolidate near all-time highs. A breakout here would reaccelerate its trend of long-term outperformance.

Granules India recently broke out to new all-time highs. Our risk management level for this breakout level is 160. If we're above 160, we can be long with longer-term targets at 220 and 313.

On a relative basis, the stock has corrected a bit but remains in a clear uptrend.

Sanofi India remains in an uptrend, above our risk management level of 6,900. As long as prices are above that level, weakness can be bought with a long-term target near 10,780.

Its relative chart has been correcting, but still remains above its long-term base breakout level and therefore is in an uptrend. We'd expect continued outperformance from the stock over the long-term.

Dr. Reddy's Labs is in the middle of our risk management level and price target, but any weakness towards 3,250 should be viewed as a buying opportunity. As long as prices are above that level, then its base breakout remains intact and targets 4,650.

On a relative basis, prices are correcting but remain in an uptrend as long as prices are above long-term support/resistance near 0.363 then any weakness can be bought.

That's our current view of the Nifty Pharma sector. There are 36 stocks in the index, but these are the ones we want to be focused on longer-term given their positive relative strength and momentum characteristics.

Should the broader market correct after its strong run off the March lows, we'd expect several of these stocks to present attractive reward/risk entries on the long side.

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

Allstarcharts Team