Celgene Corporation: This CELG Stock Setup Has 240%+ Upside

Celgene CorporationCELG Stock: Back on the Bullish Track

If you are new to charting or just curious, Celgene Corporation (NASDAQ:CELG) stock chart is a great example of charting at its best.

When I scan through hundreds of charts, I like to focus on the ones that I find clear and decisive. Some charts are just a complete mess, embedded with noise. I would rather not waste time trying to understand a message if it is not jumping out at me. It is much easier to just move on. This is why I was really enthused when I came across the chart of CELG stock.

Beautiful charts look great on multiple timeframes. Beauty equals precision, which will lay down the groundwork for a trading strategy. The following chart illustrates the long-term trend of CELG stock.

Celgene Corporation NASDAQ Chart

Chart courtesy of www.StockCharts.com

The trend observed is flawless, spanning 14 years with no signs of abating. Since 2002, the trend has been from the lower left to the upper right—sure to whet any investor’s appetite. Every sell-off was supported with demand from buyers, as the CELG stock price approached the aforementioned trend line.

The beauty of such a trend is that it serves many purposes. If I am looking to buy Celgene stock on a decline, I can set buy orders on the trend, as it acts as support. If I am looking to protect profit, I would set stops just below the trend. This is based on the assumption that if the stock falls below the trend that the uptrend is no longer intact and a major trend reversal is at hand.

From a similar perspective, it’s not only the trend that is painted perfectly; the bullish setups are also very precise.

The following chart illustrates the descending triangle CELG stock has just completed:

Celgene Corporation NASDAQ

Chart courtesy of www.StockCharts.com

From July 2015 to July 2016, CELG stock has put in a descending triangle. These triangles are consolidation patterns. Most triangle patterns have five points of contact before the pattern breaks upward or downward.

CELG stock has completed these five points of contact and has broken out to the upside is a decisive manner. At minimum, traders will be expecting a test of the former high at $140.00. If shares can trade above the previous high, this would mark a new all-time high. New all-time highs are significant because the price has no overhead resistance and shares are free to push higher.

The Trade

If we use $140.00 as a target, we can formulate a trading strategy. I like to use options because your initial outlay defines your level of risk. Options are a zero sum game. If at expiry your position is out of the money, your loss will amount to your initial outlay.

This may sound risky, but if you consider the cost of an option versus buying shares outright, it makes sense. Let me explain…

If your net outlay for the option contract is $5.88 per share, then that is the maximum amount you can lose per share. Contrast this with the current share price of CELG stock at $116.29. Losses can add up quickly if the trade moves against you.

A bull call spread would effectively capture our objective and minimize the initial outlay. This strategy involves simultaneously buying calls at one price and selling an equal amount of calls at a higher price.

For example:

  • Buying one January 20, 2017 $120.00 call contract for $7.55
  • Selling one January 20, 2017 $140.00 call for $1.67

The net outlay is $5.88 per share. At expiration, if shares are trading above $140.00, the net value of the trade will be $20.00—a profit of 240%, excluding fees.

The Bottom Line on CELG Stock

CELG stock is another good example of stocks that abide by trends. The current trend is bullish and has just been reaffirmed. I expect the share price to challenge the previous high and I have outlined one strategy that an investor could consider using to capitalize. Regardless of which strategy you utilize, risk management should always be your primary objective.