Friday, 7 October 2016

Valeant VRX Trade: Part 2

Since i bought VRX for a trade on its bounce from 50dma for reasons that i outlined in my previous post Valeant VRX: 8 Technical Reasons Why I Buy it. It has since fallen through the 50dma. This is probably partly because the market for risk appetite has been diminished in September and October where market is always has a bit of jittery. More specifically, biotech is an unloved sector because of Hilary Clinton's potential crackdown on drug prices of pharma if she gets into the presidential office. The contrarian in me love the unloved. What can i say?

3 month chart of VRX as of 7 Oct 2016 showing possible technical supports
3 month chart of VRX as of 7 Oct 2016 showing possible technical supports

As i mentioned in the previous post of this trade, i should place a stop loss at the 50dma. So i should be out of the trade by now. After struggled a little bit about exiting the trade, i decided to hold it for a while longer. As i mentioned before, i wouldn't mind hold this stock for a longer term because it's very undervalued.

After broke through the 50dma, there are further 4 possible tehnical supports,

1.  The gap indicated by the rectangular box in the chart can provide possible support. But the partial fill of the gap has eliminated this possibility.

2.   The 2nd support is the uptrend blue line that's extended from the June's bottom. It appears that this trend line provides some support, for now. The decline has temporarily arrested on this trend support for the last 3 trading days. Whether this is a temporary rest before heading lower or a reversal should be clear in the next few trading sessions.

3.  If the price drops though this uptrend line, the next support should be the low in the beginning of August of $20.

4.  The last support would most likely the multi-year low of $17.6.

I think it's unlikely that the price would fall to support 4. But we would be able to find out soon enough, especially in 10 days (on 17 Oct) when the company's earning is released. The most likely supports between now and 17 Oct would be supports 2 and 3.

If support 2 holds, the stock is therefore is firmly on the bullish trend.

If it falls to support 3, it's likely that i would buy more ahead of 17 Oct.

In terms of fundamental valuations, the consensus forward P/E is as low as 3, and Price/Sale = 0.79. These is very undervalued by any measure. With these valuations, the reward to risk ratio is very high. Of course, i'm aware of value trap. But it's way too soon to speak about that.

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