Valeant Pharmaceuticals (VRX)

There was a question somewhat recently in the Idea Chamber about the price action for Valeant Pharmaceuticals (VRX). It was noted that VRX’s price was rising on buying volume that was higher than the typical trading volume. It turns out that VRX had a new drug approved, but it turned out to be a “sell the news” event.

Valeant’s next earnings report is scheduled for February 28, 2017. So what better time to take a quick look at Valeant Pharmaceuticals (VRX) before its next earnings report.

iShares Nasdaq Biotechnology Index Fund (IBB)

Before I dig into VRX’s charts, I want to look at a chart for the IBB and analyze the sector as a whole first. If the sector chart doesn’t look good, then most of the stocks that make it up won’t fare well. So this is a 2 year weekly candlestick chart for the IBB. I’ve made a few notes on the chart, so take a look.

Analyzing a Series of Higher Highs and Higher Lows Being Made by the IBB on a Weekly Candlestick Chart

Things look ok from the sector perspective, so now let’s review some charts specifically for VRX.

VRX – Moving Averages

This first chart for Valeant Pharmaceuticals (VRX) is a 3 month daily candlestick chart from a moving average perspective. If VRX were to make a run with its upcoming earnings report, the 200 Day moving average should be resistance for the uptrend. A Golden Cross is not in the immediate future for VRX either.

Analyzing Moving Averages for Valeant Pharmaceuticals (VRX)

After the 2 strong days of volume that preceded the announcement that the FDA approved a new drug formed a Dark Cloud Cover candlestick pattern on selling volume that was greater than the previous days volume, a definite bearish signal. This bearish candlestick developed on February 16, 2017.

Even though there was this bearish candlestick just recently, there has been increasing buying volume in the last 3 days. That may be an indicator of an attempt to break above the resistance area from the Dark Cloud Cover candlestick.

I would not be a buyer of shares based on this chart until 2 things happen in order. First, VRX must break above the $17.55 high from January 10, 2017. And then after the break and possibly finding resistance at the 200 Day, pulls back in a methodical manner on light selling volume. The pullback should not drop below the $15 area.

If those 2 things happen, I would then consider a new scale-in purchase or an add-on purchase to bring your average cost down.

VRX – The Pyramid

Now, I want to take the same chart from above and illustrate a chart pattern that I have seen develop many times now. It is a pattern I have not mentioned before. I scoured by chart patterns book from Thomas Bulkowski and do not see this particular pattern. Therefore, I am going to name this pattern “The Pyramid”. Ok, maybe I have been watching too many Ancient Alien shows on the History Channel lately. But stay with me.

I’ve noticed that “The Pyramid” chart pattern typically develops after a Bearish Impulse wave pattern completes. This pattern seems to be a test my the market makers to determine the amount of buying and selling in a stock. The right side of the Pyramid should be higher than the left side. Sometimes there are consecutive Pyramids, with each one getting successively smaller. But each successive Pyramid should also make a higher low.

This pattern developed on Facebook’s daily chart after it had its hard sell-off 2 earning reports ago. It also appeared on Apple’s daily chart starting at the $102.53 low in September 2016 (through November 2016) before it started its current uptrend. Here is what it looks like on VRX’s daily candlestick chart.

“The Pyramid” Chart Pattern Developed After Valeant Pharmaceuticals (VRX) Relentless Downtrend

VRX’s Pyramid consists of a Bullish Impulse wave pattern that makes up the left side. The right side of the Pyramid is a Bearish Impulse wave pattern. When the bottom right side of the Pyramid is higher than the bottom left side, a Fibonacci Extension Tool can be placed on the chart to look for upside price potential

VRX – Fibonacci Extension Tool

I replaced the trendlines that identified the Pyramid with a Fibonacci Extension Tool. This tool helps to calculate upside price targets, as you have seen me do numerous times before.

Calculating Upside Price Targets by Placing a Fibonacci Extension Tool on “The Pyramid”

Interesting how the 161.8% Target Line (the Golden Ratio) calculates to the same area as the 200 Day moving average. A move to that area would yield a little over 20% from its current share price. Not bad for a trade but I wouldn’t be an “investor” yet.

For an investment, VRX needs to at least make it to the 100% Target Line, if not the 161.8% Target Line, in the near future.Any move lower before doing this is not a dip to buy. VRX must print a $17.56 before pulling back in earnest.

Valeant Pharmaceuticals (VRX) – Summary

A trade opportunity is there, but VRX still needs a little more time before I can recommend it as an investment. In the meantime, I will sit here with my approximate $20 average cost basis shares, waiting for things to continue shaping up. The IBB index indicates a few more weeks of wait time may be in order before that happens.

Good luck trading!

On Deck: UBNT – a member request.