Anatomy of a top – Valeant Pharmaceuticals (VRX)

As we write this, Valeant Pharmaceuticals (VRX) has dropped from $264 down to a current price of $88 and change in just two months. There has been issues with this company in the last few weeks as a few are accusing them of accounting chicanery as well as other things. In another chapter of our “Anatomy of a Top,” a keen eye would have taken you out in the 220 to 240 range, never having to deal with this carnage. Keep in mind, when something tops, one never knows how bad things can get but one needs to know what a good top looks like. The stock was a classic case. The following chart shows a break of the 50 day moving average on August 20 (POINT A). This is the first break below that important level since last October 2014.

But one can blame the bad action in the market at that time. It is the rest of the action that told us that the stock was topping. Notice how for four weeks the stock could not get going. Volume contracted indicating no interest in buying the stock back up. Notice how for four weeks the stock stayed below the all-important 50 day moving average, a complete change of what had been done for the prior 10 months. That brings us to (POINT B) on September 21. That day, the stock showed distribution right off the 50 day moving average which turned into the first stair step to the downside. The stair step completed just a couple of days later on September 25 (POINT C) when the stock did the one thing a bull does not want to see and that’s a break of the longer-term 200 day moving average. If the 50 day didn’t get you out, the 200 day  must get you out. As you can see, since that day the stock is now been cut in half. To repeat, there is no way of knowing how bad something is going to get.  But there is a way of knowing when something is topping out and risk has picked up.  Valeant was a classic leading stock topping out, breaking down and then breaking down badly.

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