It's been a tough year for anyone who owns shares of Teva Pharmaceutical Industries Ltd. (TEVA) - Get Teva Pharmaceutical Industries Limited Sponsored ADR Report - since the calendar flipped to January, shares of this $18 billion drug stock have been cut in half, underperforming the broad market during a timeframe where pretty much everything else has been moving up and to the right.
So, with that context in mind, today's 12.7% pop in TEVA's stock price is a very welcome reprieve for shareholders.
Teva is up following news that the firm's new CEO Kare Schultz plans to cut 25% of the Israeli drugmaker's workforce, and suspend dividends and employee bonuses. The extreme measures are expected to save $3 billion in costs over two years, a savings measure that's more aggressive than the cost-cutting plans that Wall Street was expecting.
But those severe cuts are designed to help tackle the biggest black cloud over Teva's stock price in 2017: its $35 billion debt load.
While the results of the cuts won't be known for a while, investors are finally getting a glimmer of hope in Teva's long-term price action. To figure out how to trade it from here, we're turning to the chart for a technical look:
Even though Teva's share price went into freefall back in August, this stock's long-term price trajectory started coming back into focus not long after. Now, in the long-term we're seeing the early stages of a textbook inverse head-and-shoulders pattern, a classic bullish reversal pattern that could lead the way to higher ground.
The inverse head-and-shoulders pattern signals exhaustion among sellers. The setup is formed by two swing lows that bottom out at approximately the same level (the shoulders), separated by a lower low (the head). The buy signal comes on a move through TEVA's neckline at $20. We're still somewhat early in the price pattern - the right shoulder hasn't even been formed yet - but that doesn't change the big picture here. A price pattern doesn't need to continue to be textbook to be tradable, and any push through $20 should be seen as a buy signal.
Momentum, as measured by 14-day RSI up at the top of Teva's chart, adds some extra upside confidence to this trade. Our momentum gauge has been making higher lows since the initial selling in August, indicating that buyers have slowly been building strength as Teva's pattern has played out.
Teva's price setup is very long-term -- because of that, it comes with long-term trading implications once the breakout through $20 happens.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.