If Valeant Pharmaceuticals Intl Inc Does THIS, VRX Stock Could Soar

Valeant Pharmaceuticals Intl IncVRX Stock: Bull vs. Bear Battle

Valeant Pharmaceuticals Intl Inc (NYSE:VRX) stock has dominated headlines for some time now. It is unfortunate that recent headlines have been negative and have affected share price. Unless you purchased shares a decade ago, chances are that you are underwater on your position.

Valeant stock is a volatile investment, but that isn’t always a good reason to shy away from an investment. There are ways to simplify the investment process and help keep investors on the right side of a trade. Simple trend-following rules would have been instrumental in capturing gains and avoiding losses. The following charts will illustrate how trend lines would have accomplished this.

Valeant Pharmaceuticals Intl Inc NYSE Chart

Chart courtesy of StockCharts.com

After the financial crisis decimated share prices globally, VRX stock bottomed in October 2008 at $5.70. Six-and-a-half years later, VRX stock hit a high of $263.81. This represented a 4,528% return that most can only dream of. An uptrend line would have kept investors on the right side of this run. The uptrend line had supported VRX stock since October 2008.

An uptrend line, highlighted in blue, is created by connecting the troughs. An uptrend is defined by higher lows and confirmed by higher highs. It can easily be identified as the price moves from the lower left to the upper right. The line was clear and defined, and provided price support. As long as the price remained above this line, Valeant stock remained bullish.

In September 2015, the price had penetrated and broke the uptrend line that stood at $175.00. This was a signal to all investors who were long that the trend had reversed. The following drop in share price was shocking; 10 months later, in June 2016, VRX stock hit a low of $18.55. If an investor used the trend line break as a signal to exit the trade, they would have avoided an 89% drop in share price.

The following chart illustrates the current downtrend line that is now in play.

Valeant Pharmaceuticals Intl Inc NYSE INDX

Chart courtesy of StockCharts.com

If we assume the same strategy is used to remain long, then the same strategy can be used to remain short, or as a trigger to get long.

The downtrend line is the exact opposite of an uptrend line. The line is created connecting the peaks and is defined by lower lows and lower highs. Current resistance is at $31.00, and VRX stock would need to close above this price level to suggest that the trend has changed. Until then, the bears are still in control.

The following chart illustrates a technical setup pattern that suggests that the downtrend will be tested.

Valeant Pharmaceuticals Intl Inc NYSE

Chart courtesy of StockCharts.com

The pattern in question on the price chart of VRX stock is a “cup and handle” formation. The cup and handle formation is a bullish pattern and the name describes its shape. I like these patterns because they provide a price objective.

The projected price objective of this pattern is the depth of the cup projected above the horizontal resistance. Based on this criterion, we get a $31.00 target. That pattern was confirmed when the share price closed above the resistance level at $24.25. Once shares break above this resistance level, they shouldn’t trade back below it. VRX stock traded back to test this level, but failed to close below, thus confirming that the price objective of $31.00 is still in play.

The projected price of $31.00 is the one-and-the-same price that currently defines the downtrend line. I can only assume that the current downtrend will be tested in the not-too-distant future.

The Bottom Line on VRX Stock

If we assume the strategy of trend following, then VRX stock would have to break above the downtrend in order to confirm a trend reversal. The current setup is suggesting a test of the downtrend. It pays to be patient, especially if it means avoiding potential losses. Therefore, I will be patiently waiting to see if that downtrend line can be broken.