Shares of Vertex Pharmaceuticals Inc. (VRTX) were downgraded by TheStreet's Quant Ratings service today. This might be a surprise to you as VRTX has gone vertical in recent weeks. Prices have more than doubled from their December nadir. VRTX also made an "eye-popping" upside price gap recently.
I am not a quantitative analyst so I will not speak to the reason or reasons behind the downgrade but VRTX is down sharply today so a quick look at the charts is in order.
In this daily bar chart of VRTX, above, we can see the strong rally over the past seven months. Prices made about a $30 price gap (void) recently on heavy volume. The gap was not followed by a new trend higher but rather VRTX stayed in a relatively tight range the past few days and volume dried up.
Compare this price action to the gap up in late March. This gap could be an exhaustion gap and the end of the uptrend for now. Exhaustion gaps happen late in a move up or down as reluctant buyers of a stock like VRTX finally come in a pay up to get long. The hoped for pullback doesn't happen so they throw in the towel and just buy it on the gap day. Prices stall and maybe the reasons for the gap are reconsidered and prices turn down.
Sound good? Let's see what a Japanese candlestick chart can show us.
In this three-month daily candlestick chart we can see the price gap and the inverted hammer pattern on the day of the gap. Japanese technical analysts call gaps windows. On Monday and Tuesday of this week there is a bearish engulfing pattern and today's weakness is the confirmation of the reversal.
Candlestick charts are good at spotting reversals but one of their drawbacks is they do not provide price targets. In the middle panel is the slow stochastic indicator (a measure of whether a stock is overbought or oversold), which has turned lower after a rare triple divergence.
Bottom line: Eastern and Western charting techniques suggest a top reversal for VRTX.
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