Consolidation Breakout: This Beaten-Down Pharma Stock is Coming out of ICU!

Pharma stocks haven’t been performing well for the last few weeks, with many stocks plunging to their 52-week lows. While has underperformed the broader market index , there hasn’t been a significant difference. In 2022 so far, the Nifty 50 is down around 9.55%, while the Nifty Pharma index has plunged 14.15%.

It might need a bit of contra thinking to look to take exposure to stock from the underperforming sector, however, the chart pattern in one of the pharma stocks might change most of the investors’ view. 

Comparative Analysis of Nifty (Purple) and Nifty Pharma (Blue)

Image Description: Comparative chart analysis of Nifty (Purple) and Nifty Pharma (Blue)

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Shares of Divi’s Laboratories Ltd. (NS:) had taken a massive hit in May 2022, as investors made an exit after the company reported a consolidated net income of INR 2,960.45 crores in FY22, compared to INR 1,984.29 crores in the previous year, which didn’t seem to impress investors. The day saw a massive cut of over 9% in the share price of Divi’s Labs, while the next three days also saw intense selling pressure. To sum up these 4 days, Divi’s Labs shares tanked by approximately 20%.

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Clearly, this high-intensity selling in a very short span of time had thrown the stock into an oversold zone, where the buyers started to kick in. The demand from the lower levels was strong enough to halt the downtrend and keep the stock from falling further. This tussle between the bulls and bears went on for almost a month, as a result of which the stock traded in a very tight range. 

Daily chart of Divi's Labs

Image Description: Daily chart of Divi’s Labs with Bollinger Bands® plotted on it

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As can be seen from the chart, the volatility squeeze has been significant as the stock progressed in a sideways trend, as depicted by Bollinger Bands®. This volatility contraction was an indication of an impending move, although the direction of which is difficult to gauge beforehand. However, as the stock was already in the oversold zone, a bounce back from there had a higher probability.

So what’s happening now? 

First, the stock has breached the resistance of its consolidation phase. The upper bound of INR 3,637.25 had easily been surpassed yesterday and today the stock is trading around INR 3,665 which gives a clear signal of a range breakout.

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Apart from this range breakout, Divi’s Labs shares have also closed yesterday’s session above the upper band of the Bollinger Bands®, which also indicates that the volatility in the stock is probably about to expand. Volatility expansion increases the possibility of an impending sharp move which is icing on the cake after a breakout on the charts. 

The upside resistance seems to be at a distant point due to a sharp sell-off in May 2022. The nearest resistance where the impending rally could halt is around INR 3,930 – INR 3,900. However, as pharma stocks have broadly underperformed the market, the risk of relative weakness still persists. 

Disclaimer: This is not investment advice and investors should do proper due diligence before making an investment decision.

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