Valeant Stock: This Will Determine What VRX Stock Does Next

VRX StockVRX Stock: Bottom Fishing

Valeant Pharmaceuticals Intl Inc (NYSE:VRX) stock made headlines last week when it reported its earnings and, to the dismay of the bulls, earnings were disappointing as Valeant missed on both the top and bottom lines.

Valeant management guided lower as they now expect total revenue to come in at $9.55 billion-$9.65 billion in 2016, down from their previous forecast of $9.9 billion-$10.1 billion. They forecast earnings per share to be $5.30-$5.50, compared with the previous forecast of $6.60-$7.00.

In my last article on Valeant stock, I was looking for a potential bottom that would mark the end of this current bear market. The requirements for this bottom involved price closing the week above a specific level. At the time, I wrote that the possibility looked promising as VRX stock surged 33.75% that day. By week’s end, the bears ended all speculation of a potential bottom as they quickly pushed the price back down.

VRX stock has been punished over the years, and I am looking for an ever-elusive bottom in the share price. On average, bear markets end when the share price loses more than 90% of its value from its peak. It is at this point that I look for the price to develop a reversal pattern, because the proceeding really can be quite explosive. VRX stock has fulfilled the 90%+ decline, but a reversal pattern has yet to develop.

The following price chart illustrates the trend line that has defined the bear market in Valeant stock.

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Chart courtesy of StockCharts.com

The downtrend that has developed is clear as day and is defined by the trend line (highlighted in blue). This line is created by connecting the peaks on a price chart. A downtrend is defined by lower lows and confirmed by lower highs. It can easily be identified as the price moves from the upper left to the lower right. This is a clear example of bearish price action. Shares will continue to trade with a bearish bias for as long as the trend line remains intact.

I used a weekly scale to illustrate the downtrend because I would be looking for the price to close above this trend line on a weekly basis to confirm that a trend reversal to mark the bottom is in play.

The volatility surrounding this name has gone into overdrive, as illustrated on the Valeant stock chart below.

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Chart courtesy of StockCharts.com

Valeant stock was setting up a potential bottom going into earnings, but that bottom was completely debunked after VRX stock gapped below this level of support.

There is a slight silver lining, as the price action following this gap down has been positive. As soon as VRX stock opened up for trade following the earnings report, buyers have stepped in to push the share price higher. This is illustrated as all the candles on the chart following the gap down are hollow, indicating that VRX stock closed the day higher than when it opened the day for trade.

VRX stock is now testing the previous area of support, and what develops from this test will determine what happens next. If the price gets rejected at this level, then a retest of the lows at $14.00 becomes the next price objective but, if Valeant stock can close above this new level of resistance, the downtrend line could be tested once again.

If the price can close above the horizontal trend line, this would mean that the gap down on the stock chart was an exhaustion gap. An exhaustion gap indicates that a trend has run its course, and that a reversal is at hand. Accomplishing this feat would be a tremendous win for the bulls, and would increase the odds that the downtrend will be tested and broken.

Bottom Line on Valeant Stock

Valeant stock disappointed investors last week, but the price action has yet to confirm this disappointment because the gap that was put in has effectively been erased. If VRX stock can close above resistance, there is a good chance that a trend reversal is developing.