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Nifty Pharma In Focus
  • : October 27, 2020
  • : B. Krishnakumar
Nifty Pharma In Focus
This week, I decided to focus on the NSE Pharma sector which has been a top performer in 2020. Nifty Pharma index will be a wonderful case study for anyone trying to understand the importance and relevance of the relative strength concept. Have a look at the charts displayed below.

The first chart below is the relative strength chart of Nifty Pharma index versus the Nifty 50 index and the second is the Nifty Pharma index.

This is a textbook case of how a sector transforms from an underperformer to a outperformer category. Pay close attention to the positive divergence between the price action and RS (relative strength) chart.

The RS Chart bottomed out in November 2019 and started recovering. It made a series of higher highs and higher lows way back in Feb. 2020. While the price chart of Nifty Pharma index made a new low on an absolute basis in March 2020 the RS chart made a higher low in March.

This is the classic positive divergence that I was referring to. This is the first step or the first clue that the sector is witnessing some market interest. The Nifty 50 index made a low in late March and rallied by 30% to record a high of 9,890 on April 30. The Nifty Pharma index on the other hand posted a gain of 53% during this period recovering from 6,432 to a high of 9,602 on April 27.
Remember, a sector that outperforms the underlying during the fall will do far better when the underlying improves. This is precisely what happened in Nifty Pharma index.

The purpose behind this exercise is to highlight the importance of the RS concept and how there were enough and subtle clues in the RS chart even before the sector turned around. The RS chart started displaying positive signs from November 2019 even as the Nifty Pharma index was plumbing to new lows.

The compelling evidence was visible during the COVID-19 driven carnage in March. While the Nifty cracked big time and so did the Nifty Pharma index, the damage in the Pharma index was relatively muted compared to Nifty 50.

Now, have a look at the Nifty Pharma Index using 0.25% box size with a 7-box reversal.

I chose 7-box reversal because it managed to encompass the entire corrective phase from April 2015. It was in this reversal combination that the 45-degree trendline from the peak managed to halt or contain all subsequent pullbacks. The idea is that when the trendline breakout happens, it should be really significant and conclusive evidence of a trend reversal.

The price has managed to breakout above this trendline that has contained price for over 5-years. After the trendline breakout, a follow through buy signal too has been triggered which is a bullish sign. I would remain bullish on the Pharma index as long as the price sustains above the trendline. From the Pharma sector, I like stocks such as Aurobindo Pharma, Torrent Pharma, Ajantha Pharma, Granules, Cadila Healthcare to name a few.

I would also consider buying a Pharma sector mutual fund to participate in this outperformance cycle. As always, have an exit plan and do not get carried away with your analysis.