Valeant Pharmaceuticals International. (VRX) shares have been hampered since making a record high last August at $263.81. The near 90% collapse stemmed from dismal figures and more importantly in September after the controversial drug maker was reportedly questioned by the House Oversight Committee for price increases for two drugs designed to treat heart conditions Isuprel and Nitropress. The congressional subpoena news for price gauging then was followed by many activist short sellers jumping on the trade and then the freefall accelerated in late October after a report surfaced that sales may be recorded only when the product is given to a patient. The headlines of potentially fake sales have kept the bearish pressure on the stock.
Today’s rally stemmed Pershing’s Ackman optimistic comments that a new CEO will may be found in within weeks. In after-hours trading, the company also announced that a majority of creditors agree to back a loan agreement. The terms highlight increase fees on the loan in exchange for a default waiver, excusing the company from delinquent financial filings.
Price action on the VRX daily chart shows that the downward trend gained momentum once the death cross pattern formed and the 50-day SMA cross below the 200-day SMA. The chart also highlights a breakaway gap that kept the bearish slide going.
The recent stabilization ahead of the $25.00 handle also displays a potential bullish ABCD pattern that could support a rally towards $47.60, which is the 23.6% Fibonacci retracement of the C to D leg.
If the reversal pattern is invalidated and we see the $30 level break, price may continue to slide towards the $25.00 zone.
The Trade: Buy VRX at $34.50, with a stop loss at $31.50 and a take profit at $43.50. The Risk/Reward Ratio is 1:3