Celgene Stock Has Put in a Textbook Topping Pattern

CELG Stock: A Bear Market in Development
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CELG Stock: A Bear Market in Development

If you are having a difficult time with the current market conditions, I have bad news to share. It is difficult for me because I do not like to be the bearer of bad news, but I am still going to give it to you straight: Aside from a year-end rally, I do not believe that things are going to get any better next year. If anything, things are poised to get a lot worse.

The reason why my outlook is so grim is because I believe we are in the early innings of a bear market. As a matter of fact, I firmly believe that the market is in the process of putting in a significant top. Once this top is completed, it will confirm that the bullish trend that preceded it has come to a conclusion and that a new bearish trend has begun.

Bearish trends lead to lower stock prices, which is a hallmark characteristic of a bear market. Bear markets are no laughing matter. They are brutal, and they are responsible for absolutely decimating share prices. This is why, when possible, a bear market should be avoided at all costs.

For instance, I am focusing on Celgene Corporation (NASDAQ:CELG). From a technical perspective, CELG stock has already put in a textbook version of a topping pattern, and a bearish trend has followed. This suggests that Celgene stock is now in the grips of a bear market. Lower stock prices are likely to follow.

This textbook topping pattern I am referring to is captured on the following Celgene stock chart.

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Chart courtesy of StockCharts.com

The chart above illustrates that, for the better part of three years, CELG stock has been putting in a topping pattern.

This topping pattern contained a significant level of price support at $95.00. On October 23, 2014, Celgene sustained a close above $95.00 for the first time. For the next three years, every time the stock price approached this price point, buyers were eager to step in and support it.

It seemed as though a floor was being established, where Celgene stock could gain its footing so it could make another move toward a new all-time high. In September 2017, Celgene stock did just that, and it broke out to a new high. The problem is that the stock price was unfortunately unable to sustain this move, resulting in a failed breakout.

Failed breakouts are never to be dismissed, because when they do occur, they have a tendency to produce violent moves in the opposite direction. This time was no different. Over the span of three weeks, CELG stock dropped by 35%, erasing five months’ worth of gains in the process. When everything was said and done, Celgene was testing price support at $95.00 once again.

The initial test of price support following the failed breakout resulted in a typical bounce, but this move quickly petered out and Celgene stock quickly turned lower. This sell-off caused CELG stock to break below $95.00 in February 2018, shattering price support in the process.

The breakdown below price support, which is highlighted on the chart above, was an indication that the price action over the last three years was CELG stock putting in a top. This is why lower prices immediately followed when support was finally broken.

After an initial 20-point drop, Celgene found its footing and staged an advance. This move toward higher prices ended up testing the infamous $95.00 price point from beneath.

Returning to test a previous level of price support is a significant event called a backtest. This type of price action is very common following a breakdown, because it serves to reaffirm that the original break below price support was legitimate while simultaneously establishing that level of price support—in this case, $95.00—as a new level of price resistance.

Backtests also act like springboards, which tend to accelerate the move in development. This is why, when this backtest was completed, Celgene stock proceeded to accelerate lower, forging a new low.

The price action is now being characterized by a sequence containing a series of lower lows and lower highs. This is, of course, the quintessential characteristic that defines a bearish trend. These factors are why I would avoid CELG stock until it finds its footing and puts in a bottom.

Analyst Take

I am bearish on Celgene stock because it has put in a top and has proceeded to sustain a bearish trend. These indications continue to suggest that lower prices are likely to persist. As a result, I will maintain a bearish view on CELG stock until there are indications to suggest otherwise.