Celgene Gearing Up for Another Correction

 | Sep 12, 2013 | 6:08 PM EDT  | Comments
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Celgene (CELG) discovers, develops, and commercializes therapies for cancer and immune-inflammatory related diseases in the United States and Europe. The company's stock traded in a range for six years following a strong rally that took place from 2003 to 2007. After a preliminary breakout from this upper-level congestion in 2011, Celgene has once again been on the bull path.

All bull runs need a chance to catch their breath though, and Celgene is showing signs of short term exhaustion. It has already hit and surpassed the 100% expansion level from the 2003 to 2007 rally, indicating extension on the larger trend and the decent potential for a short-term correction. Although it should be noted that the pace of the bull market rally will make a larger monthly correction through price unlikely in the near future. Volatility along highs is more probable. This brings us to the daily charts.

 

Celgene (CELG) Daily Chart
Source: TradeStation

 

 Celgene pivoted off highs once already on the daily and weekly time frame in early August. The pullback itself caught my attention. I'm often on the lookout for potential swingtrade candidates that I will hold for 3 to 15 days on average. One strategy that works well is a security that pivots off a high in an extended uptrend with a pattern resembling an inverted "V". If this is followed by a rally that has slower momentum than the rally heading into the original high but leads to a slightly higher high, it tends to create a "bull trap". This traps investors buying new 52-week highs, but it also flushes out the bears that were hoping for a stronger reversal already.

In the case of Celgene, the second rally is slower than the move into the late July highs, but only modestly. This means that even though Celgene is still a good candidate for a correction, it could still go for another daily high in another 4 to 6 weeks. This confirms the swingtrade bias for the trade, whereby Celgene is less likely to make a full retest of the August lows, but the zone from those lows will still serve as a target. I have shown the upcoming support levels in Celgene on the 90-minute time frame below.

In addition to slower momentum than the first rally, I want to see two smaller trend moves to the upside take place within the rally. As I've shown on the 90-minute chart, Celgene has them. Sometimes a third move can happen, although it tends to be much smaller than the first two and will serve more as its own smaller bull trap. That is where Celgene is currently positioned and volume is dropping as it shifts momentum at July's highs.

 

Celgene (CELG) 90-Minute Chart
Source: TradeStation

 

As with any trade, patience is a virtue. Some strategies may look nearly textbook, but still not offer a trigger. Often this is tied to strength or weakness of the security's sector, or even the market itself. Celgene does not currently have a trigger point, but it does favor the development of one.

A sloppy entry trigger on this position would simply be a break of the uptrend channel on the 90-minute time frame with a stop over the pivot high. Traders with more finesse, however, will want to monitor the 30-minute chart for an intraday reversal strategy off highs. A channel break can happen without an intraday reversal strategy, thereby trapping the bears. Additionally, when an intraday reversal pattern does develop, it will typically allow a trader to keep tighter risk parameters. In both cases, the added emphasis on the smaller time frames for entry timing are beneficial.

My target is $135 on this proposed correction in Celgene, but I have shown the closer support levels on the 90-minute chart as well in case the momentum on the correction is slower than the correction that took place in early August.

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