Valeant Pharmaceuticals Intl Inc: The Following VRX Stock Charts Support a Bullish Outlook

VRX StockVRX Stock: An Uptrend is Born

Valeant Pharmaceuticals Intl Inc (NYSE:VRX) stock is a biotech stock that has been getting a lot of attention from the media in recent years. It’s actually amusing to me that companies receive twice as much media coverage and attention when their business prospects begin to sour. VRX stock was a rock star in the eyes of many portfolio managers until the wheels fell off the bus in September 2015 as problems began plaguing this company.  The share price cratered, leaving many in shock.

The shock and pain that followed for those holding Valeant stock could have been avoided if a trusted trend line was used to define risk. A simple trend line only requires drawing a line on a price chart. For something that seems so simple, the trend line is an important tool in a trader’s toolbox , and I can argue that it is my most important tool.

The following chart of Valeant stock illustrates the power of a trend line.

vrx

Chart courtesy of StockCharts.com

The uptrend line, highlighted in blue, is created by connecting the troughs. An uptrend is defined by a trend in which trading is dominated by higher highs and higher lows. It can easily be identified as the price moves from the lower left, to the upper right. This trend line is clear and defined, and has provided price support on many occasions. When Valeant stock traded below the trend line, it was a signal that the dominant trend higher had reversed, and it was a good reason to step aside from the trade.

The subsequent selloff was stomach-churning as VRX stock proceeded to drop by 89%. The same tool that was used to define the bull market can also be used to define the bear market, and is illustrated below.

vrx2

Chart courtesy of StockCharts.com

The downtrend line is the exact opposite of the uptrend line. The line is created by connecting the peaks, and is defined by lower lows and lower highs. There should be no mistaking an uptrend from a downtrend.

I am excited by the recent developments as VRX stock has broken the downtrend line. The pattern of lower highs and lower lows had ceased, and in theory, this action suggests a reversal of the trend and an end to the bear market.

If the break of the uptrend line signal led a trend reversal, which led into a bear market, then perhaps the break of the downtrend line is just the beginning of a new uptrend.

The break of the trend line is not the only positive piece of good news that the chart has to offer. The following Valeant stock chart illustrates the bullish shorter-term price action on a one-hour scale.

vrx3

Chart Courtesy of StockCharts.com

The short-term chart above is littered with bullish price patterns.

The bottom in July and August was confirmed with a cup and handle formation. These patterns are bullish and they were instrumental in setting up the break of the downtrend. I like this pattern because it also provides a price objective I can use to formulate a strategy and manage risk.

After the bullish pattern was confirmed, the price surged higher in what is described as an impulse wave (highlighted in green). Impulse waves are especially bullish if they are followed by a consolidation wave (highlighted in purple), and that is exactly what happened in late August. Consolidation waves, on average, mark mid-points. If this premise is true, then the price objective of the impulse wave that follows the consolidation wave is $40.00. If share price closes below $28.00 I would have reason to believe that this premise is false.

The Bottom Line on VRX Stock

VRX stock has been crushed in recent years. Stocks have a tendency to overshoot both on the upside and the downside, and Valeant stock is no exception. There have been a number of positive developments in the share price that can be viewed as bullish. I have switched my bias on VRX stock to bullish, and I will continue to hold that bias until the charts give me reason to change course.