Bill Ackman’s Pershing Capital sold its 27.2-million share Valeant Pharmaceuticals International, Inc. (VRX) position in March, recovering around $11 per share after buying at an average price of $177 in 2015. Ironically, his painful departure could signal a final bottom for the scandal-plagued biotech, ahead of a long-term recovery into the 30s. While that’s just pennies on the dollar after a 250-point decline, it would book a nearly 300% profit compared to the current price.
Clearly, this setup isn’t for the faint of heart, given the repeated success of predatory short sellers to transform every rally attempt since August 2015 into a major bull trap. However, those clever folks have moved on to other vulnerable securities in recent months, leaving this former blue chip in the hands of retail traders and smaller funds committed to beaten-down turnaround plays.
VRX Long-Term Chart (1994–2017)
The stock entered the national exchange at 58-cents (post two stock splits) in 1994 and entered a strong uptrend that stalled at $10.00 in 1996. It stair-stepped higher into the new millennium, finally topping out at $57.19 in January 2002, ahead of a steep downturn that found support in the upper teens. A recovery wave into 2003 stalled well below the prior high, setting off a long-term downtrend that continued into the 2008 low at $6.65.
It turned sharply higher in 2009, returning to long-term resistance in the mid-50s in 2011 and stalled at that level for more than 20 months, ahead of a major breakout into 2013. The subsequent buying impulse caught fire, triggering a vertical advance and nearly 400% uptick into the August 2015 all-time high at $263.81. Questionable business practices then made international headlines, triggering a historic collapse.
Selling pressure eased in April 2016 after a 35-point one day decline dropped price into a descending wedge that persisted into a breakout earlier this month. The monthly Stochastics oscillator has carved an unusual pattern during this period, bouncing into a buy cycle that failed in the fourth quarter of 2016, ahead of a higher low in April. This odd double bottom could signal a major turning point that establishes a new but limited uptrend in coming months.
VRX Daily Chart (2015–2017)
The last leg of the decline ended in April 2017 within 2-points of the 2008 bear market low, giving way to a bounce that broke descending wedge resistance just two weeks ago. This signals a change in character, confirmed by the biggest On Balance Volume (OBV) uptick since the downtrend began in 2015. The rally also cleared resistance at the 50-day EMA for the first time in two months.
Price action around the moving average should offer actionable data in coming weeks because aggressive short sellers triggered major reversals the last two times it traded through this line-in-the-sand. Saying it another way, a successful test at new support near 12 should attract broad buying interest that lifts price toward steeper resistance at the 200-day EMA, currently descending from the low-20s.
Multiple layers of resistance await upticks above that level, predicting the rally will eventually run out of steam. The mid-30s looks like a probable end point because that’s where the descending wedge began with a 35-point down day in March 2016. That wide range price bar still holds a large supply of shareholders looking to get out even, marking a good reason to take profits and move on, even though bullish sentiment should increase geometrically between now and then.
The Bottom Line
The long Valeant Pharmaceuticals downtrend may have come to an end, offering excellent reward: risk potential for long-term market timing positions. Interested players can enter at the current level with a logical stop loss or await a successful test on a pullback to the 50-day EMA.
<Disclosure: the author held no positions in aforementioned stocks at the time of publication.>