Don't Fall for the Trap in Pharma Stocks

The Nifty Pharma index hit a 52-week low of 11,542 last month and witnessed a short-covering rally in sync with the market trend.

On the monthly chart, the index ended up forming the bullish harami candlestick pattern in the month of March 2023 and rallied to reclaim 12,500 levels in quick time.

Pharma is a defensive sector but the golden period of the pandemic for pharma companies marked a top for the sector.

Pharmaceutical products were in high demand during 2020-21. As soon as investors realised the V-shaped recovery in global equities, money flew out from pharma stocks into aggressive sectors.

But recently the Nifty Pharma index rallied for straight five weeks and paused at the major hurdle on the chart.

Nifty Pharma Index, Daily Chart

 

On the daily chart above, the bullish momentum seems to be taking a pause as we are witnessing multiple cautionary signs.

1. The 200 DMA Channel
   
   The 200-Day Moving Average (DMA) is a commonly used technical indicator calculated by taking the average closing price of a stock over the past 200 days to analyse the stock's trend.
   
   Traders and investors often use the 200DMA to identify whether a stock is in an uptrend or a downtrend.
   
   If a stock is trading above its 200-day moving average, it's in an uptrend, and if it's below it, then it's in a downtrend.
   
   On the chart above, I have created a 200 DMA channel using the 200 DMA (High) marked by an orange line and 200 DMA (Low) marked by a green line.
   
   The index approached the resistance zone of the channel and turned southwards indicating the bulls were tired at the hurdle.
2. Trend in Overbought Zone
   
   The relative strength index (RSI) is a popular technical indicator used to measure the strength and momentum of an index or stock.
   
   The RSI above 70 is considered to be an overbought zone, signaling the stock may be due for a price correction or a reversal.
   
   As the index faced a resistance at the 200 DMA channel, it also entered an overbought zone on RSI (lower panel on the chart), signaling a pause to the bullish momentum and that a reversal may be on the cards.
   
   The oscillators hinted at the reversal and the index turned from the hurdle.
3. The Bearish Follow-up
   
   The bullish candle followed by doji and the bearish pattern, is visible on the chart as the index witness follow-up selling from the resistance and the overbought zone.

The chart setup indicates that traders should look for a sell-on-rise strategy as long as the index is trading below the hurdle of the 12,600-13,000 zone.

Instead of looking at pharma stocks, investors should focus on the buzzing sectors which are outperforming the Nifty50 or the Nifty500 index.

I'll share more on this trend on my Telegram group. If you're interested in being part of my charting journey as I share how to create wealth from profitable trade setups, join my telegram channel - Fast Profits Daily.

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