Valeant Pharmaceuticals ($VRX) has been in play the past week with headline-driven price action. On Monday (2/29/16), VRX was gaping down after delaying results and withdrawing guidance, which caused it to be on my intraday watchlist for the day. Due to the increased volatility of the stock, I knew I needed to be careful and needed to pick my spots carefully to remain compliant with my personal risk parameters. Ideally, I wanted to see some type of tight consolidation intraday to trade against in order to better control my risk.
As you can see in the chart below (intraday, 1 minute chart), VRX drove lower on the open and proceeded to trade in a relatively tight range between $74.50 and $75.10. What I liked about this setup was the following: In Play stock with a fresh news catalyst (i.e., independent order flow), opening drive lower, test/failure at VWAP and holding below VWAP, and tight intraday consolidation.
As you can see, I got short towards the top of the opening range with a decent amount of size. I then added to my short position on the break below the bottom of the opening range as a type of momentum lot (I was quickly stopped out of those added “momentum” shares when the stock traded back above the bottom of the opening range). I eventually got flat around $73.
It can be difficult, especially for newer traders, to sufficiently and prudently control their risk with stocks that exhibit high levels of volatility. The wider intraday ranges of these types of stocks can lead to getting stopped out of a position several times, which can lead to trader frustration (I can empathize with this frustration as well!). However, when you have a tight range to work with, like the setup in VRX on Monday, the frustration can be reduced, as you are able to work with more clearly defined levels. This is one of the reasons I love consolidation plays.
If you are not comfortable with stocks that exhibit wild, momentum-type price action, then the best thing to do is to wait for price contraction (the opposite of price expansion) in order to allow clearly defined levels to develop so you can better control your risk and lower the stress level of the trade to a more reasonable level.
Thanks for reading. Please let me know if you have any questions or comments.