Nifty Pharma one the most hated sector in this bull market for a variety of reasons. The number one reason is negative returns since Apr 2015. Till now index had lost a maximum of 42.28% from its peak. Which is very close to the drawdown during the 2008-2009 crisis period. During 2008-2009 economic crisis period Nifty Pharma had made an extreme drawdown of 44% from its peak.
So here comes the question as a sector is Nifty Pharma is a value buy? If so what is the upside potential? What are the odds that downside risk is mitigated?
What if the drugmakers are likely to witnesss continued pricing pressure from U.S?
Let’s keep fundamental aside and let’s look into some of the technical data points
Nifty Monthly Sentiment
On the monthly timeframe, Sentimental RSI is showing extreme where the trend is prone to counter-trend reversal. Extreme RSI sentiment often brings investing opportunity as the downside risk is largely mitigated.
Nifty Pharma Daily Charts
On 6th Nov 2015, Dr Reddy’s Laboratories Ltd, India’s second-largest drugmaker, has received a “warning letter” from U.S. regulators over inadequate quality controls at three manufacturing plants producing drugs for cancer and other diseases. Stocks fell almost 15% which resulted in a Nifty Pharma Index crash of 3.21%. That week alone index suffered a crash of almost 7.1%
The Subsequent week Monday morning 9th Nov 2015, Nifty Pharma sell-off was triggered by the setback suffered by the BJP-led NDA in Bihar assembly elections which resulted in a weekly gap down. Gap levels come around 12205 levels which will be primary target levels where people reacted more emotionally which eventually resulted in a liquidity crisis and further unwinding of positions from the Nifty Pharma like an avalanche reaction. Which we call it as a scene of crime (SoC)- a situation which index is expected to revisit in the medium to long-term consideration. The Scene of Crime Zone (Weekly Gap) is exactly 50% from the current level of Nifty Pharma Index – 8117
Nifty Pharma – Responsive Coppock Charts
Responsive Coppock is an excellent tool to identify the long-term bull market in advance. Increasing slope defines the early identification of bull market and Coppock levels above zero indicates a traditional continuation of the bull market as long as the Coppock value maintains above zero. Last couple of days negative slope in nifty pharma stopped and looking into turn around mode. Also, a visible divergence is seen between Coppock and Nifty Pharma price levels which shows that selling momentum is clearly mitigated. Price is hovering just below Aug 2017 lows means index had literally yielded almost zero returns in the last 1 year period which is not a huge negative number though.
Nifty Pharma – Retracement Levels
Retracement levels from the recent long term swing high are
1) 0.382% retracement levels at 10235
2) 0.5% retracement levels at 10958
3) 0.68% retracement levels at 12000 (generally fibo lovers use 61.2% retracement. considering the fact that what if some more downside is left?
so made an extra cushion to adjust the retracement to 0.68% levels that works out 12000 i.e near to Weekly Gap levels 12205)
Nifty Pharma – Monthly RRG Charts
Monthly RRG charts are showing increased momentum transitioning from lagging quadrant to improving quadrant indicating long-term relative outperformance relative Nifty 50 benchmark is getting lot better and expect to outperform in the continued months due to increased jdK momentum factor.
Overall, technically Nifty Pharma is a value buy if you are ignoring the fundamental situation and ground realities of pharma sector with a decent upside potential of 50% with 6-8 months horizon.