Allergan PLC (AGN), a worldwide pharmaceutical company, is set to report earnings on May 7. Investors are looking for earnings and revenues this quarter to come in lower than the results for the first quarter last year.

With Wall Street not expecting much, this puts Allergan in a unique position to see its stock move significantly following the report. Shares have been consolidating for months now, creating a classic wedge formation in its price pattern.

Chart showing the formation of a wedge pattern for Allergan PLC (AGN)
Optuma

A wedge pattern is called so because it forms a wedge shape, with two converging support and resistance levels. In this case, the rising support trendline in green is converging on the declining resistance line in red, creating the wedge shape.

Wedge patterns are similar to triangle patterns. They have clear support and resistance levels, they tend to be continuation patterns and the expected move is the height of the pattern itself.

In the case of Allergan, the wedge formation has a height of $40 per share, or roughly 27% of the stocks current price. Knowing that a wedge is a continuation pattern leaves us to expect the breakout to be lower. That could send shares down to $100 per share, pricing in a $40 move from a break below the $140 level of the support line.

When we zoom out on the chart, we get a clearer picture of the downward trend the stock has been stuck in.

Chart showing the downtrend for Allergan PLC (AGN)
Optuma

The current wedge pattern is acting as a counter move to the overall downtrend, giving investors a great opportunity to add to bearish bets ahead of the breakout. Earnings on May 7 could very well be the initial breakout point, seeing shares either plunge 10% or break out higher with a 10% pop.

The Bottom Line

Allergan stock is set to make a roughly 30% move in one direction or the other. Technical analysis points to this breakout coming to the downside, giving us a price target of $100 per share.