Valeant might see a monster mean reversion

Valeant Pharmaceuticals (VRX) has fallen roughly 90% from its August 2015 highs, but is now potentially setting up for a counter-trend rally.

Structurally this stock remains in a strong downtrend, but is now testing long-term support near 25-27. Prices first tested this level in March and April of this year, rallied briefly, but are now slightly undercutting those lows as momentum attempts to put in a bullish divergence. If prices are above 27 on a weekly closing basis, that would confirm the bullish momentum divergence and failed breakdown.

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The daily chart provides a closer look at the failed breakdown and bullish momentum divergence that’s already been confirmed from a tactical perspective. As long as prices are above the April 4th lows of 25.27 on a daily closing basis, the bias remains to the upside with a price target up toward the top of the range near 37.

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With prices roughly 420% below their 200 day moving average, this failed breakdown has the potential to develop into a much larger move over the long-term if price action in the stock continues to improve.

The Bottom Line: There has been little reason to bottom-fish VRX throughout this dramatic 10-month decline, but the current weight of evidence suggests that the tactical bias has shifted to the upside. Bulls want to see this stock follow-through to the upside and confirm the structural failed breakdown with a weekly close above 27.

Tactically we only want to be long this name if it remains above the April lows of 25.27 on a daily closing basis. The average true range over the last 14 days is roughly $3.15, so if you’re going to trade this, be sure to factor in the high volatility of this name into your risk management plan.

As always, if you have any questions feel free to reach out and I’ll get back to you as soon as I can. @Brunicharting

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JC here – This one reminds me a lot of Yahoo in early February when we wanted to buy it around $27 (see here: Buy Yahoo Feb 3rd). I’ve been watching $VRX closely over the past week and could not agree more with what Bruni is suggesting here. I particularly like the fact that there are bullish momentum divergences on both weekly and daily timeframes. That’s a great combination. The one thing I would add is that using some kind of options strategy here might not be the worst idea. Because of the added headline risk in this name, owning premium instead of  or in addition to the common stock helps define the risk. On the stock side, the line in the sand is extremely well-defined. Discipline if you’re wrong is key on this one. $VRX is NOT something to own if it is below the March lows.

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