Monday, June 16, 2014

VRX: A dark cavern of ambiguities

Valeant Pharmaceuticals International Inc. (VRX) has been declining since late February. The price's move below the 20-day price channel on June 12 has continued with lower lows for two days running.

No stock signal is obvious. All are subject to interpretation, but with most, it is possible form a clear picture of what a bull or bear signal might mean.

But then, there are those signals that, far from leading the trader down the sunlit path toward understanding, instead push the trader into a dark cavern filled with ambiguities.

The Chart

Elliott wave analysis show the break below the channel to be part of a counter-trend correction of the rise from $81.94 that began June 21, 2013 and peaked on Feb. 27 at $153.10.

That peak marked the end of wave 3 in the base degree of that rise.

The decline so far has retraced 50% of wave 3, and that level -- $117.52 -- is proving to be a sticking point. This is the second time that VRX has made a run at crashing through that level. The first time it bounced after three attempts, and last week's break below the channel is the first attempt this time around.

Click on chart to enlarge.
VRX 3 years 3-day bars (left), 180 days hourly bars (right)
Note that VRX has shown a tendency toward double tries to pierce resistance, giving up on the second attempt and reversing course. I've marked three of those on the left-hand chart with red arrows, at the end of wave {-1}, wave 4 {+1} and 2 {+1}.

I've labeled the decline from Feb. 27 as the first three waves of five within an A-wave to the downside, meaning that there is room for VRX to fall. I based that labeling on the time it took to complete each of the sub-waves in the {-1} degree.

However, there is no requirement in the Elliott rules that waves of the same degree be time proportionate. If I move the labeling up one degree, then VRX is in wave C to the downside and is close to completing its correction.

I noted the alternate count (marked "Alt:") on the right-hand chart.

I don't think its likely that the correction will end quite this soon, but it's not impossible. And that possibility introduces a lot of ambiguity into this chart. I can say clearly that it is a counter-trend correction, so any bear play on VRX is contrarian.

The question then is how much downside is there within the contrarian move. If the degree is large enough, then there is certainly plenty of profit to be made.

The primary count leaves more room to the downside than the alternate count does. I would be far more comfortable waiting for a break below the wave 1 {-1} low of $115.14, set April 8, before committing to a bear position. But even that breakout through the lower boundary of the 55-day price channel does little to resolve the ambiguities of this chart.

If the correction turns out to be a sideways movement, what is called a Flat in Elliott, then the present level might well be near the low, but an end to the correction might be some distance away.

After the correction has run its course, then I expect VRX to rise beyond $153.10 as wave 5 within wave 5 {+1}. The end of wave 5 will usher in a significant correction to the downside.

Decision for My Account

At this point, I can end my analysis. I find the ambiguities of the VRX chart to carry more risk than I'm willing to assume.

I don't intend to open a bear position in VRX and shall remove the symbol from my Watchlist.

See "Friday's Outcomes: LUV, VRX, CTL" for a discussion of why I put FRX on the Watchlist in the first place.

-- Tim Bovee, Portland, Oregon, June 16, 2014


My shorter-term trading rules can be read here. My longer-term trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.

I use the number 68.2% in using applied volatility to calculate the expected trading range. This comes from statistics and refers to the one standard deviation boundaries, which are expected to contain 68.2% of whatever is being studied. Putting it another way, given an item (a trade or whatever), there is a 68.2% chance that it will appear within those boundaries.

Elliott wave analysis tracks patterns in price movements. The principal practitioner of Elliott wave analysis is Robert Prechter at Elliott Wave International. His book, Elliott Wave Principle, is a must-read for people interested in this form of analysis, as is his most recent publication, Visual Guide to Elliott Wave Trading

Several web sites summarize Elliott wave theory, among them, Investopedia, StockCharts and Wikipedia.

See my post "Chart Analysis: Nomenclature" for an explanation of my method for labeling waves on the chart.

By preference I place my shorter-term trades in the last half hour before the closing bell in New York. See my essay "When is the best time to trade" for a discussion of the practice.

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decisions for his or her own account, and take responsibility for the consequences.

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