Valeant Pharmaceuticals (VRX) shares are up today despite a Moody’s downgrade to a new tranche of secured notes and a negative rating outlook. Shares of the beleaguered company doubled in value from their depressed April level to the July high. A short-term double top formed at the high and the stock quickly retraced 50% of the previous move. An inverse head-and-shoulders pattern has formed, suggesting the decline is over and a bullish reversal may be under way.
The August low marks the left shoulder of the bullish reversal pattern, with the September low as the head, and the recent consolidation that has been going on above the 200-day moving average delineates the right shoulder. Neckline resistance is intersecting with the 50-day moving average in the $14.75 area. The relative strength index crossed above its 21-day moving average as the head of the pattern was forming, and moving average convergence/divergence made a bullish crossover. Both indicators are tracking higher and are above their center lines, reflecting improving price and short-term trend direction. Earlier this month, the Chaikin money flow indicator moved up from a very low reading into positive territory. It suggests the stock is seeing renewed buying interest.
Bollinger bandwidth is an indication of tight band compression, which is a reflection of low volatility. Previous similar periods of low volatility have been followed by periods of high volatility, and a break above neckline resistance could initiate another sharp move in the stock price.