Friday, 23 September 2016

Valeant VRX: 8 Technical Reasons Why I Buy it

My technical analysis informs me that the time is ripe for an entry into Valeant Pharmaceuticals International, Inc (VRX).

 Brief Overview 
After being hit by a series of horrendous news headlines, VRX stock price plummeted from the high of $263 in August 2015 to a low $20 in June 2016. In other words, in just 10 months, the stock had plunged for more than 92% in price. Under this kind of circumstances, the stock is typically very oversold on fundamental valuation. The babe was thrown out together with the bath water.

In those 10 months, it was a very hated stock. Hence its valuation becomes attractive. What about now? Is is safe to dive into the stock?

technical analysis, Valeant VRX one year price chart
Bear rallies repeatedly being rejected by 50dma resistance

There were several sizable bear rallies during the free fall where the bulls bought the stock, thinking the bear market for VRX was over, and only saw the stock price went lower repeatedly (indicated by 5 red arrows. Actually there should be 6. I missed one) when the prices reached the 50dma line (indicated by blue line). It's clear that this 50dma acts as strong resistance throughout its dramatic fall.

On 9 Aug, for the 1st time since the start of this painful drop that its price manages to convincingly broke through this 50dma (as indicated by the green arrow). The huge price gap-up was due to this reason.

 Short Term View 
Let's drill down and look the price actions in the last 3 months more closely.

technical analysis, Valeant VRX 6 months price chart
VRX chat showing huge price gap-up on 9 Aug 2016

Now, on 22 Sep 2016, VRX provides a nice entry for the following technical reasons:

1.  Prices have moved from below the 50dma to above it since 9 Aug. The sentiment for the stock has flipped.
2.  This 50dma resistance has now acted as support (as indicated by 2 green arrows).
3.  50dma has turned up.
4.  It's expected, in fact a bullish sign, that after breaking though such resistance and had some whopping 50% run-up in 3 weeks, the price then falls back to retest its support. The retest price is exactly a 50% retrace of this run-up.
5.  The volume is large on the way up, but falling as the prices fall (as indicated by the falling black arrow in the chart above). This is also bullish for the stock price, telling us there're more buyers than sellers, overall.
6.  RSI indicates oversold for the short term.

This is an excellent trade with a perfect technical setup with a clear stop loss at the 50dma support.

This is also a nice entry for long term investors who believe in this company. All the negative news and lots more have been priced in.

 Weekly Chart View 
Let's look at the weekly chat for more clues.

technical analysis, Valeant VRX weekly price chart
Weekly price chart

Another 2 more technical supports for buying:

7.  Both technical indicators - RSI and MACD - are showing positive divergences, which is bullish for stock.
8.  The stock price also shows a reverse head and shoulder formation (shoulder at around the price of $26.50). At the very least, it's a bottoming pattern.

Depending on the ongoing price action. I'm quite happy to hold it for longer time frame.

I bought it at $26.90.

UPDATE: 24 Sep 2016
In the following trading session after i bought and wrote about this stock on 22 Sep, a bullish engulfing candle pattern was formed. Bullish engulfing candle is a signal of a trend reversal. In this case, from falling to climbing. While the trend reversal already has occurred for 2 days, but this candle reinforces the crowd's bullishness further.

One more bullish technical reason - 9 in all - for me to buy this stock.

VRX price chart showing bullish engulfing candle

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