Celgene: Breaking Out?

Celgene, (CELG), is another large cap drug company that is looking to break out technically. The chart is a sweet piece of art, but it also poses a couple of problems. Take a look at the daily chart below. A strong trend higher finding support occasionally at the 100 day Simple Moving Average (SMA). It just pulled back in a bull flag and is now pressing higher. A break over the previous high at 165.74 and it should be off to the races towards a Measured Move higher at 180. It failed to break that and hold Thursday, and after a gap higher, making for a possible Evening Star reversal pattern. But I can get

over that if it gets the mojo to break higher Friday. The piece that raise is caution is the RSI on the monthly chart at near 80. There is precedent for it to move higher with an elevated RSI. It went from 13 to 75 with the Monthly RSI in technically overbought territory from 2005 until 2007, and has moved from 77 to the current 164 overbought the entire time. In fact the entity of the two moves since 2005 have been in technically overbought territory on the monthly RSI. So if you have an aversion to starting positions when a stock is overbought on the monthly RSI near 80 what do you do? The first thing in a large cap name is to check the dividend. No dividend in this name so no need to only play the stock. We will look at

options to control and limit risk but still be able to participate in a move higher if it materializes. I suspect from the last move that it might take until mid January to achieve the target. Since it does not report earnings next until the end of January I can use the January calls as a driver in the trade. I took a starter position today, buying the January 165 Calls for $6.34 which is pretty expensive in a stock that has an implied volatility under 30. I offset some of that cost by selling the January 180 Calls for $1.59, and will look to lower it further by selling weekly or December Calls tomorrow or next week. The Call Spread limits your downside to the $4.75 premium, or less than 3% of the stock price. Probably about the same you would risk on a stop loss on the stock but without the gap risk.

Disclaimer: The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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