Todays Big Stock: Valeant Pharmaceuticals (NYSE:VRX)

Top executives from Valeant Pharmaceuticals International Inc told Reuters on Friday that Valeant wants to become the world’s biggest player in the skincare sector in about five years. The company has backed those statements up recently with a string of recent mid-sized acquisitions in the highly fragmented but lucrative dermatology sector.

The specialty drug maker said on Friday it will pay $345 million to buy the skincare unit of Johnson & Johnson-owned Janssen Pharmaceuticals. It was the second such deal for Valeant last week. The other was its planned $425 million acquisition of Sanofi’s Dermik skincare business. Friday’s news sent Valeant stock (VRX) up 4.50% to $55 per share.

Please take a look at the 1-year chart of VRX (Valeant Pharmaceuticals International, Inc.)) below with my added notations:

VRX has created a common chart pattern known as an Ascending Triangle. Combining a horizontal resistance with an up trending support forms an Ascending Triangle pattern. As the support and resistance converge on each other the pattern forms. Untrue to common perception, Ascending Triangles do not always break higher; they can just as easily break lower. This is why some traders might wait for the breakout or breakdown before entering a trade.

Just like with Rectangle patterns, Triangles will provide you with clearly defined breakout and breakdown points. In the case of VRX, the breakout would be above $55 (red). The breakdown would be below the trend line support (green), which as of now appears to be the same $50 that has acted as support over the last month or so. On Friday, VRX closed at a key area of resistance on a significant increase in volume.

The Tale of the Tape: VRX has formed a very common chart pattern know as an Ascending Triangle. A trader could enter a long position on a break above the $55 resistance OR on a pullback to $50. Stops should be set under the entry level, either $50 or $55. However, if VRX were to break below the trend line support (currently near $50), a short trade could be entered with a stop above the trend line.

Before making any trading decision, decide which side of the trade you believe gives you the highest probability of success. Do you prefer the short side of the market, long side, or do you want to be in the market at all? If you haven’t thought about it, review the overall indices themselves. For example, take a look at the S&P 500. Is it trending higher or lower? Has it recently broken through a key resistance or support level? Making these decisions ahead of time will help you decide which side of the trade you believe gives you the best opportunities.

No matter what your strategy or when you decide to enter, always remember to use protective stops and you’ll be around for the next trade.  Capital preservation is always key!

Good luck!
Christian Tharp, CMT