Wait for a Second Bite at Celgene

Here's an analysis of the drug company's chart, as well as charts of Qualcomm and Psychiatric Solutions.
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This column was originally published on RealMoney on Jan. 11 at 12:01 p.m. EST. It's being republished as a bonus for TheStreet.com readers.

Have you ever seen a chart with a stock that looked destined to fly to the moon? Yet as soon as you jumped on for the ride, the stock crashed and burned? We've all been there. How about the experience of holding a stock through a steep decline as it sells down day after day?

You are intent to hold through the decline -- maybe you'll even buy more on the first sign of strength. The stock continues to fall until you just can't take the pain anymore. You sell before it goes even lower, only to find that you sold at the very bottom.

You were wrong at the extremes. You buy the rally when you should have been selling. You sell the decline when you should have been buying. How do you get past the natural reaction of getting excited when an unbought stock is screaming, or when a holding is self-destructing?

I talked with the well-known futures trader Larry Williams about emotional extremes a couple of years ago. He has a laughably simple approach: "I just do the opposite of what my instinct is telling me to do," he said.

I ask myself what I would be doing if I had caught the move at the beginning. If I see a stock that is racing higher, my natural inclination is to want to chase it -- to buy it on pure momentum. Why? Because most traders love to be right. "I may have missed the best entry, but I'll at least get a taste of it and declare myself a winner."

When I'm getting that feeling in my gut, I imagine the guy who caught the entire move. Am I letting him dump his position and laugh all the way to the bank, or am I competing with him as he tries to buy even more stock? If the former seems more likely, I pass on the trade.

By stepping into the shoes of the guy on the other side of your trade, you get a pretty good feel for whether emotional extremes are controlling the stock, or whether the price movement is due to the normal ebb and flow of the market.

Let's move on to some stocks I've recently covered to see how they're doing.

A couple of days ago, I said that

Celgene

(CELG) - Get Report

was a bit

too hot to buy at current levels. This is one of those cases where I put myself in the shoes of the other guy. Are stockholders anxious to sell now, are they buying more or are they simply holding out for higher prices?

Frankly, it's a tough call because there is a lot to like about this drug company. But if you look at the breakouts on the chart above, you'll see that you had a second chance within a couple of months. The late August breakout ran for less than a month before completely retracing. The early November breakout above the September high was revisited in mid-December.

There is no denying the uptrend, but I still think patience will be rewarded with a pullback under $65 because I suspect that a lot of hot money is in this stock for the short-term pop. When momentum wanes, sidelined bulls will get a second bite at the apple.

In mid-December, I predicted that the consolidation in

Psychiatric Solutions

(PSYS)

was

likely to lead to a breakout. That breakout occurred last week, but we can see that the bulls are taking profits now. I'd stand aside until they're done, and I'd move on if the stock falls back into congestion beneath the breakout level.

In October, I wrote that

a break above $45 in

Qualcomm

(QCOM) - Get Report

would provide a good entry point. That occurred last week.

So far, the breakout is holding. The last three months of consolidation have involved sufficient churning to reduce the likelihood of significant profit-taking. Watch what happens if the stock pulls back to test support. If it holds above the uptrending support line, you've got your second chance to buy.

I've written about

Building Materials Holding Corporation

(BMHC)

a couple of times over the past month, as the stock has been rolling over. Most recently, I suggested that the

bulls might take the stock higher after the nasty decline to $64. This snapback rally is in process.

Think it's going higher? There are a lot of people who bought Building Materials during that stagnant fourth quarter and now have a second chance to get their money back. My bet is that they jump on the opportunity and sell. Any weakness would be my signal to sell.

Be careful out there.

Dan Fitzpatrick is a freelance writer and trading consultant who trades for his own account. His columns focus on quantitative strategies for trading and investing. Fitzpatrick has lectured throughout the U.S. on the proper use of technical analysis and options trading. At time of publication, Fitzpatrick held no position in any stocks mentioned, though positions may change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While Fitzpatrick cannot provide investment advice or recommendations, he appreciates your feedback;

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