VRX stock: Bullish Price Action
Valeant Pharmaceuticals Intl Inc (NYSE:VRX) stock has been a focus of mine for some time because I find it peculiar how people react to stocks that have fallen from great heights. For some reason, the mentality that some investors have toward fallen stocks is that they focus on where the share price has come from, and not why it has fallen.
Perhaps they believe that the price will once again revisit its old levels, or perhaps the price is so far below those prevailing levels that some solace remains for those fortunate enough to pick up shares at the current prices. I am not sure the exact logic, but I only know that I have been victim to it on more than one occasion.
This mindset tends to prolong trends, and I will explain. Investors see a company like VRX stock fall from triple digits to double digits and they believe that an opportunity is at hand. These new buyers are the same investors who send shares falling once again when the price meanders to new lows and they swiftly exit, fueling further loses. A new cycle begins with a new set of investors believing that they too have found a stock that is worth owning, based on the current price compared to prevailing levels.
The trend finally ends when the last bull finally gives in and dumps the shares and there are no other bulls interested in repeating their mistakes. This process ultimately results in the share price overshooting on the downside, and it is at this point where tremendous opportunity exists.
The following Valeant stock chart illustrates the developments of such a process.
Chart courtesy of StockCharts.com
The Valeant stock chart above illustrates the predominant trend lower, highlighted by the downtrend line. This trend is created by connecting the peaks on a price chart. The longer a trend line is in place, the more significance that is placed upon it. The duration of this trend line was almost one year in the making until it was finally broken in the middle of September. A break of this trend line does not rule out a test of the lows, but it does signal that the worst levels are now behind VRX stock.
It is to the bulls’ delight that this feat was finally accomplished, but a broken trend line does not mean a new bull market was born. I need to see VRX stock set up a bullish price pattern that alludes to higher prices before I can be reassured of such optimism.
The following Valeant stock chart illustrates positive developments since the trend line was broken.
Chart courtesy of StockCharts.com
The cup-and-handle pattern was the first pattern that pointed to an upward bias. This pattern looks as it sounds, as the pattern looks like a teacup. The price objective of this pattern is the depth of the cup extrapolated above the horizontal trend line that completes the pattern. The target price for VRX stock was $31.00, and that level was attained with ease once the pattern was confirmed.
The VRX stock price has also become bullish after the completion of the cup-and-handle pattern; this is observed by the structure of the price pattern. An impulse wave developed as the bullish pattern completed, and Valeant stock nearly hit $33.00 as a result. The pattern that followed is known as a consolidation wave, which is characterized as an area of congestion where the price is digested.
Bullish consolidation waves move against the predominant trend, and it is rare for such patterns to not be followed by another impulse wave. Confirmation of a new impulse wave would be confirmed when the channel that is highlighted in purple is broken to the upside.
The uptrend line highlighted in blue is created by connecting the troughs on the chart above. This trend line began when VRX stock bottomed in June 2016, and the price needs to remain above this line for the bullish premise to hold. The current consolidation wave could find support at $25.00, and that would coincide with support on the uptrend line. I have little doubt that traders will be eyeing this level, as it represents an area of multiple supports. At minimum, I would expect some sort of bounce in Valeant stock at this level.
The Bottom Line on Valeant Stock
Valeant stock is still early in setting up a tradeable bottom, and the first step has been completed in which the downtrend was broken. The second step I require is that the price action sets up a bullish pattern—a break above the channel outlined as a consolidation wave—that would be sufficient to fulfill this criteria. My bias on VRX stock is currently bullish and as long as the price remains above the uptrend line, my view will remain unchanged.