Don’t Sweat the Downgrade, Valeant Stock Remains Bullish

Valeant Stock
credits:istock.com/bluebay2014

VRX Stock: The Technical Analyst vs The Fundamental Analyst

Valeant Pharmaceuticals Intl Inc (NYSE:VRX) stock was downgraded on December 14 by a JPMorgan Chase & Co. (NYSE:JPM) analyst citing valuation concerns. It caused the share price to fall by 10.75% that same day. The timing of this downgrade comes two days after I came out proclaiming that a new bull market in Valeant stock had just been initiated.

So the question is, am I wrong in my beliefs or did the JPMorgan analyst get it wrong? I learned a long time ago that I should never allow other people’s opinions to sway my judgment, so I will take this time to outline the indications responsible for creating my view that a new bull market in VRX stock is currently in development.

My opinion is based on technical analysis while the JPMorgan analyst’s opinion is based on fundamental analysis. I have been schooled in both methods and I prefer the technical approach because when it is applied correctly, the results are simply outstanding.

The following Valeant stock chart illustrates the event that confirmed my suspicions that a bull market is now in development.

Advertisement

Valeant stock chart

Chart courtesy of StockCharts.com

This VRX stock chart contains the infamous “line in the sand” that has been the topic of many publications. This line in the sand marks a level of price resistance that resided around $18.50. Since falling below it in November 2016, there were multiple attempts at moving beyond it.

Also ReadBiotech Stocks: List of Top 10 Biotech Companies to Watch in 2017

While Valeant stock was trading below this infamous level of resistance, I outlined that a number of indications have swung into bullish alignment, suggesting that a move toward higher prices was in development. Breaking above this level of resistance was the last hurdle I needed to confirm my suspicions that a bottom was being formed.

On December 8, Valeant broke above resistance, confirming my suspicion that VRX stock has bottomed and simultaneously creating the view that a new bull market is now in development. This event was the basis of my publication titled “The New Bull Market in Valeant Stock Has Just Begun,” and the title says it all.

One of these indications that supported the break above resistance is highlighted on the following Valeant stock chart.

valeant price chart

Chart courtesy of StockCharts.com

The indication highlighted on this Valeant stock chart is a golden cross. This indication was created in July when the faster 50-day moving average, highlighted in blue, crossed above the slower 200-day moving average, highlighted in red.

A golden cross is a very influential indicator that implies a bull market is in development.

When this indication was finally generated in July, it was the first time since October 2015 that these moving averages were in bullish alignment. The implications suggested by this indicator were magnified in November when a death cross was averted.

Averted signals are very powerful indications because it takes an immense amount of strength to stop a signal from being generating. This is a display of inherent strength, and I wasn’t the least bit surprised to see VRX stock break above resistance once this occurred. As a matter of fact, I actually expected it.

Now that I have outlined why I believe a bull market in VRX stock is now in development, I will outline how I think things are going to progress going forward.

valeant stock chart

Chart courtesy of StockCharts.com

The downgrade by the JPMorgan analyst caused the VRX stock price to correct. I have the inclination to believe that this correction is going to test the previous level of price resistance that thwarted a number of attempts to move beyond it.

Returning to test a previous level of price resistance is not uncommon and such an event is called a backtest. A backtest serves to reaffirm that the break above resistance was legitimate while simultaneously establishing this level as a new level of price support. I refer to this type of price action as one last kiss goodbye, as the share price returns to a previous level of resistance in order to pay its respects before the new bullish trend toward higher prices reaffirms itself.

Analyst Take:

I am bullish on Valeant stock and I am maintaining my bullish view on it that a bull market in VRX stock is now in development. This view was based on a number of indications that were generated on the company’s stock chart, and as long as these indications support the notion of higher prices I will maintain my bullish view.