Fitz Bits: Look Beyond the Technical in Celgene

Today we'll look at some reader requests:

• Celgene (CELG - commentary - Cramer's Take)
• Dow Chemical (DOW - commentary - Cramer's Take)
• iShares FTSE/Xinhua China 25 (FXI - commentary - Cramer's Take) ETF
• Diana Shipping (DSX - commentary - Cramer's Take)

Each day, I'm featuring several reader requests for the current technical take on a stock. I can't assure you that I'll get to yours, but I will certainly make every attempt to do so, as long as the stock meets the following criteria.

1. The average daily trading volume needs to exceed 250,000 shares. If a stock trades too thinly, chart analysis doesn't help much, because there just are not that many traders involved. One big buy or sell order can move the stock in ways that chart analysis just cannot predict. So let's stay above 250,000 daily shares.

2. The stock really needs to be trading above $5. Sub-$5 stocks don't get the same treatment by institutions and portfolio managers. Also, many traders set their trading screens to ignore stocks below $5 just to cut down on their trading candidates. While I'm sure your favorite penny stock is the next undiscovered gem, I'm not in the business of breaking news stories ... so once your gem is discovered, let me know, and I'll take a look at the chart.

3. Make sure you check my recent "3 Stocks" videos. I don't want to be too redundant, so if I've recently covered a stock in video format, I won't repeat it here.

Hopefully, you've noticed that I alternate between daily and weekly bars in the charts. It's important to understand the underlying rationale for choosing one time frame over another. I differentiate between these time frames in pretty simple terms.

The longer time frame -- the weekly bar chart -- is my "decision" time frame. I want to remain in phase with the trend, and I use the weekly bar chart to identify the trend. So I'll feature a weekly chart when I want to emphasize a certain aspect of the prevailing trend -- not a specific buy or sell point. This weekly chart is the time frame in which I make my decision: Do I want to buy or sell the stock?

The daily chart is my "action" time frame. Once a decision is made on the basis of the weekly time frame, then we zoom in on the daily chart to choose that level at which action is taken. The daily time frame is my preferred frame of reference for actually implementing the decisions I've made on the weekly chart.

In your own analysis, make sure you are using different time frames for different things; otherwise your actions will largely be a function of your emotions.

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Another reader asked me about this monthly chart of Celgene, wondering whether it was forming a massive top with the two peaks in the mid-$70s. While that might be the technical picture, Celgene is a biotech company. I treat biotechs differently than, for example, the S&P 500. With so many changes in the biotech industry, and in a particular company's fortunes, I I give a lot more weight to fundamental developments than to a monthly chart. I think CELG is a buy in the high $40s.

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I've highlighted the extreme distance between the November low and the 200-day moving average of Dow Chemical. It often pays to monitor this relationship. When a stock is an extreme distance below a long-term moving average and the market begins to rally, the oversold stock will almost always go with the market uptrend. Well, that happened with DOW, but the easy money has been made. I wouldn't buy right now. Instead, I'd wait for either a pullback to prior short-term support at $17.50 or for evidence that there is real buying interest -- a breakout to a new December high.

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The iShares FTSE/Xinhua China 25 ETF is tough to buy right now, though I am currently long. Notice how the chart has resistance at $27.50 and a 50-day moving average looming overhead. Monday brought the breakout, and yesterday we saw a pullback. The lowest-risk time to buy is on a pullback to $27.50, though it's tough to know whether that retest will occur. If you're long, you might think about trading around the position -- selling some into strength with the intent of buying it back on any weakness. I think FXI has turned a major corner.

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Diana Shipping remains in a massive, volatile downtrend. Notice how each short-term low was matched by a deeply oversold reading in RSI? Well, each short-term peak is matched by an RSI reading of around 50, and that's where it is now. I'd use this rally as a selling opportunity. Even if you like DSX, it's tough to argue that this current strength is anything other than a chance to exchange a marked-up stock for cash.

Be careful out there.

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Know what you own: Fitz mentions Celgene. Other companies in the biotech sector include Genentech (DNA - commentary - Cramer's Take), Amgen (AMGN - commentary - Cramer's Take) and Gilead (GILD - commentary - Cramer's Take).

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At the time of publication, Fitzpatrick was long FXI, though positions may change at any time.

Dan Fitzpatrick is the publisher of StockMarketMentor.com, an advisory newsletter and educational forum dedicated to teaching effective risk management and trading methodologies to aspiring traders and investors. He is a former hedge fund manager and a member of the Market Technicians Association, and he now trades from his home in San Diego, Calif. While Fitzpatrick holds various securities licenses, he does not give recommendations to buy or sell stocks. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. He appreciates your feedback; click here to send him an email.