Dr Reddy’s Laboratories on the verge of breakout, sees strong short-covering

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Shares of Dr Reddy's Laboratories Ltd are on the verge of a downward sloping trendline breakout, signalling accumulation before an actual breakout.

"The stock of Dr Reddy’s Laboratories has marked a high of 5,990 on August 24, 2023 and thereafter it has slide into the period of consolidation. The consolidation was halted at 5,205 level in October 2023 and thereafter it has started marking the sequence of higher tops and higher bottoms. It is on verge of a downward sloping trendline breakout. The trendline was formed by connecting swing highs from August 2023," Sudeep Shah, head of technical and derivatives research at SBI Securities, said.

Technical charts of Dr Reddy's showing scrip on verge of breakout | Source: SBI Securities

Shah noted that on Wednesday, the stock witnessed above 50-day average volume, signalling accumulation before an actual breakout. The stock is trading above its short and long-term moving averages, both in a rising trajectory, which is a bullish sign. The daily RSI and Stochastic have given a bullish crossover, with the daily RSI surging above the 60-mark for the first time in 13 trading sessions.

In terms of derivative data, significant short-covering is observed, with a 4.28 percent surge in the January series future. There is also a notable 3.33 percent decline in cumulative Open Interest (OI) across the current, next, and far series. Call open interest is concentrated at the 6,000 and 6,100 strikes, while put open interest is prominent at the 5,800 strike.

Option chain analysis reveals either call buying or call short-covering in the 6,200 to 5,600 CE strikes, indicating a bullish momentum. On the put side, put writing or put long covering is observed in the 6,100 to 5,400 strike range.

Therefore, Shah recommends accumulating the stock in the zone of Rs 5,910-5,850 with a stop loss at Rs 5,700. On the upside, the stock is likely to test the levels of Rs 6,200, followed by Rs 6,300 in the short term.

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