F&O: After an 83% Rally, this Stock Makes ‘Dark Cloud Cover’!

One stock from the F&O space that had been roaring for the last few months is Glenmark Pharmaceuticals Limited (NS: GLEN ). Supported by a rally in the pharma sector, the share price of this company delivered a very beefy return of over 83%, from February 2023 to today’s high. Although small caps can easily portray such sharp gains in a short span of time, traders also need to understand that these kinds of gains have a high probability of reverting.

As the mood of the broader markets was spoiled today by a noticeable strength of bears, traders looking for short opportunities can have a look at this counter. After a non-stop rally, the stock made a dark cloud cover candlestick pattern on the daily chart which is a strong reversal pattern. I always stress on one thing, the higher/lower these reversal patterns form on the chart, the more reliable they become.

Image Description: Daily chart of Glenmark Pharmaceuticals with volume bars at the bottom

Image Source: Investing.com

In the case of Glenmark Pharmaceuticals, the pattern has materialized at the 52-week high which should definitely not be ignored. The volume on today’s reversal day has also been good, with over 4.38 million shares exchanging hands on the NSE, which is around 210% higher than the 10-day average volume of 1.4 million shares. This could be an indication of investors finally liquidating their holdings at these overbought levels.

To further give you a glimpse of the overbought status of the stock, the RSI (daily, 14) was showing a reading of 79.29 on Wednesday, making it a good candidate for mean reversion trades. Now as the reversal pattern has been formed on the chart long holders might need to relook at their positions to either take some profits home or tighten their stops.

Today, as the stock fell 2.2% to INR 648.4 (spot), it might keep the pace of falling till it reaches its nearest support of INR 580 - INR 590. If stop losses are difficult to place, traders can look for risk-defined options strategies to skew the risk-to-reward ratio in their favor such as a bear put spread.

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