For most Nifty Indexes, the largest components have a very large weighting on index performance, and Nifty Pharma is no exception. Sun Pharmaceutical Industries Limited (SUNPHARMA.BO) represents roughly one-quarter of the index, so today, we're going to look at its role as a potential leading indicator for the rest of the sector.
Below is a daily line chart of the Nifty Pharma Index overlayed with Sun Pharmaceuticals. What we see from this relationship is that Sun Pharma generally leads the index, so when it's showing relative strength, a move higher is likely, and when it's showing relative weakness, then a move lower is likely. The two rarely separate from each other for long. (See also: Evaluating Pharmaceutical Companies.)
Why this is relevant to us now is because, in May, when the index undercut its August 2017 lows, Sun Pharmaceuticals actually held those lows and has been showing relative strength ever since. With history as our guide, this suggests that we may want to be looking for a move to the upside in both Sun Pharmaceuticals and the sector as a whole.
For some additional context, here is a daily chart of Sun Pharma covering the past three years. In June, prices broke above the downtrend line from the 2015 highs and have been consolidating ever since to allow the 200-day moving average to flatten out and begin rising. This is exactly the type of action you want to see in a stock when it's bottoming, and if it's bottoming, then the sector is likely not far behind. A move above 597 Indian rupees targets 726 rupees.
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