During earnings season, we often see big moves and gaps in stocks following earnings reports, as fast-money traders move quickly to reposition on or against the news. Trading action after the news-driven hoopla dies down, the fast money moves on and the big money starts to respond may be more indicative of whether a new trend is under way or if the news trading was just noise.

Fallen star Valeant Pharmaceuticals International, Inc. (VRX) has started to show signs of life. The shares popped Tuesday after the company announced that, excluding items, it earned $1.04 per share, well above the $0.88 Street estimate. Despite a 10% drop in revenue, the company has improved its earnings over a year ago and continues to reduce its debt burden. (See also: Top 3 Companies Owned by Valeant.)



Gaps in the short-term Valeant stock chart suggest that the shares may have bottomed out and appear to be starting to recover. Earlier this week, prior to the company's earnings report, the shares gapped down and then gapped up, forming a small island bottom, leaving bears trapped offside. Following the earnings report, the shares staged a big breakaway gap to the upside and have held above the top of the gap, a sign of renewed interest.

The initial pop up through $12.20 toward $13.60 on a spike in volume opened a window that has not yet been filled back in. Should the shares continue to hold above $13.60, it would indicate renewed accumulation on strong underlying interest.



On the other hand, the rally has been contained by resistance in the $14.70 to $15.00 area, indicating that, while traders have become more cautiously optimistic, they are not losing their minds over the results. The shares still appear to have a big wall of worry to climb. Should Valeant shares manage to break out again, the next resistance may appear near $16.00 or $17.00, both of which are prior support or resistance levels.

The shares currently find themselves in a $13.60 to $14.30 trading range. A breakout to the upside could challenge the $14.70 to $15.00 zone, where a test could indicate whether this is the start of a new uptrend with the next resistance near $16.00 to $17.00 or just a relief rally. On the flip side, if new support at $13.60 fails to hold, it would indicate that the bulls have lost interest or that the bears have reasserted themselves, opening the possibility that the breakaway gap could be filled back in.

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