Here’s Why Investors Should Avoid Valeant Stock
Has the great run in Valeant Pharmaceuticals International, Inc. (NYSE:VRX) finally run its course? Today’s chart says “perhaps.”
Over the past few years, the Canadian-based company has become one of the world’s biggest biotech players. Valeant doesn’t actually develop any drugs itself. Rather, the firm is a master at buying smaller companies, then raising prices on all of their products and pushing new drugs through its massive distribution network.
The formula has worked out well for investors. Since late 2010, Valeant stock went from $25.00 a share to over $260.00 last summer. It’s one of the biggest stock market winners in recent memory.
Some investors, however, expect this big run will be followed by a big fall. Stories like VRX stock often get very expensive and very popular, later disappointing shareholders who arrive late to the party. That may be what’s starting to happen.
Over the past week, VRX stock has plunged over 20% after Democrats in the U.S. House asked to subpoena the company for documents relating to drug price increases. It’s only one of the many moves by politicians seeking to curb price hikes on acquired drugs. But could this spell the end of the bull-run in Valeant stock?
Let’s take a look at the chart.
Chart courtesy of www.StockCharts.com
I’m concerned about the volume in Valeant stock trading. The number of shares being exchanged is important because it can be used to confirm trends and chart patterns. Any price movement up or down with relatively high volume is given a greater weight than a similar move with weak volume.
That’s why, if you are looking at a large price movement, you should also examine the volume to see whether it tells the same story. During the bull-run, VRX stock saw higher volume on up days and lower action on down days, suggesting the stock was under accumulation. But now that pattern has reversed, indicating smart money investors are unwinding their positions.
VRX stock is also forming a clear head-and-shoulders pattern. This common, easy-to-spot event often signals the end of a bull-run. We can break down the chart above into three sections.
Left Shoulder: Bulls push prices upwards making new highs; however these new highs are short-lived and prices retreat to $220.00.
Head: Prices don’t retreat for long because bulls make another run, this time succeeding and surpassing the previous high; a bullish sign. However, prices retreat once again, only to find support at $220.00.
Right Shoulder: The bulls push higher again, but this time fail to make a higher high. This is extremely bearish, because bears did not allow the bulls to make a new high or even an equal high. The bears push prices back to support. But at this critical moment, the bulls fail to make another push higher and the stock breaks below support.
A head-and-shoulders pattern tends to signal a reversal in the underlying trend, indicating the bull-run in Valeant stock appears to be over. I wouldn’t try to pick a bottom in this stock until a new uptrend has been firmly established.