Valeant Pharmaceuticals International, Inc. (VRX) shares collapsed from the $260s into the single digits between 2015 and the first half of 2017, caught in a price gouging scandal that attracted congressional outrage. Endlessly bad news flow finally eased in the second half of this year, allowing the beaten-down drug distributor to build support in the low teens. It has now accomplished that mission and entered a long-awaited accumulation phase, raising the odds for significant 2018 gains.
The stock should end 2017 with a 30% to 35% annual return, setting the stage for January Effect buying pressure that may generate a rapid trend advance into the mid-$20s. Technical barriers grow geometrically from that level into the upper $30s, where 2016 battle lines were drawn by bulls and broken by bears, triggering a climactic decline between $38.50 and April 2017's eight-year low at $8.31.
Traders should not expect a return trip to this decade's lofty high in the coming years because reorganization and new management have set more modest goals, seeking to leverage assets left intact following technical and political battering rams. In addition, exorbitant drug pricing could float to the top of the administration's agenda at any time, given endless conflict about the government's participation in the national healthcare system. (See also: Valeant Turns First Profit in Six Quarters.)
VRX Long-Term Chart (1994 – 2017)
The stock came public at a split-adjusted 58 cents in 1994 and entered an immediate uptrend that topped out near $10 in 1996. A three-year trading range gave way to a 1999 breakout, lifting into the upper $50s following the Sept. 11 attacks. That peak marked the highest high for the next 11 years, ahead of a downtrend that posted lower highs and lower lows into October 2008, when it finally hit bottom at $6.65.
A steady uptrend finally reached the 2001 high in 2011, giving way to a rounded correction that completed the handle of a multi-year cup and handle pattern. It broke out in 2013 and went vertical, gaining more than 200 points into the August 2015 all-time high at $263.81. A minor pullback escalated into a full-scale retreat a month later when Turing Pharmaceuticals CEO Martin Shkreli triggered a media and political firestorm, raising the price of a life-saving drug from $13.50 to $750.
VRX Short-Term Chart (2015 – 2017)
The decline accelerated through 2016 and into the second quarter of 2017, dumping the stock into the single digits. The stock gained ground into mid-year and has just posted the highest high since November 2016, following a breakout above the descending highs trendline in place since May 2016. The rally has also reached the .382 Fibonacci retracement level of the selling wave that started in the upper $30s at that time, setting harmonic targets at $27 and $32.
The trendline has aligned with the 200-day exponential moving average (EMA), raising odds that a pullback into support between $16 and $17 will mark a low-risk buying opportunity. Meanwhile, the buying wave may target the November 2016 swing high at $24.30, which preceded a five-day 10-point plunge when a deal to sell assets fell through. Just keep in mind that many shareholders who bought at that time are trapped just above $20, looking to get out even.
On-balance volume (OBV) topped out in July 2015 and plunged into April 2017. The subsequent accumulation wave stalled in June, ahead of fresh buying power that has lifted above the indicator midpoint, even though the stock would need to move 100 points higher to match the distance. This signals a strongly bullish divergence, with funds and institutions reloading positions in expectations of substantial 2018 upside. (For more, see: Valeant Stock: Gaps Suggest Potential Recovery.)
The Bottom Line
Valeant Pharmaceuticals stock shows signs of heavy accumulation, in line with a new uptrend that could eventually reach the upper $30s. Even so, it is wise to expect setbacks along that path due to massive overhead supply from a nearly lethal self-inflicted decline. (For additional reading, check out: Top 3 Companies Owned by Valeant.)
<Disclosure: The author held no positions in the aforementioned securities at the time of publication.>