Google Coils for Spring Above $500

This column was originally published on RealMoney on May 11 at 11:28 a.m. EDT. It's being republished as a bonus for TheStreet.com readers. For more information about subscribing to RealMoney, please click here.

You've requested that I look at charts of Google(GOOG Quote), Rite Aid(RAD Quote), Onyx Pharmaceuticals(ONXX Quote), Ballard Power Systems(BLDP Quote) and Double-Take Software(DBTK Quote) today. I'd also like to address a topic that draws quite a bit of debate here on RealMoney and now in Stockpickr's Answers section (look for me in there as Danimal).

A Stockpickr user asked a question about the benefits of technical analysis vs. fundamental analysis. I spent some time on the answer, but want to share with you my thoughts on one of the weaknesses of technical analysis.

The shorter-term your trade, the more technicals matter and the less that becomes the case for fundamentals, sentiment or economic cycles. Taken to an extreme, daytraders don't care about fundamentals. Why would they care if they own the stock of a company with a price-to-earnings ratio of 50 if they're only going to hold it until lunch?

Short-term traders don't care about such factors because they're trading the emotions and actions of other traders, not the emotions and actions of the underlying company's board of directors. The shorter the holding period, the less company fundamentals matter and the more the stock's technicals matter.

But as your horizon expands into a longer time frame, technical analysis tends to lose its appeal. It can still be important, but new price and volume data print every single day. The current steady, obvious uptrend could last another year or end tomorrow because of some exogenous event.

In the latter scenario, yesterday's technical analysis is null and void, and you go back to the drawing board. But the fundamentals may not have changed at all. So fundamentals matter when we look to a further horizon.

But there is no rule that requires technicals or fundamentals be used to the exclusion of the other. Technical analysis works best when combined with fundamental data.

Find me a great company with solid fundamentals, and I'll spend some time looking at the chart of the stock, the industry group it's in, its sector and the broader market. I can then use that information to make a more informed decision about whether I want to buy stock in that great company now or whether I want to wait for it to fall another 10% -- or perhaps even advance above an established level of resistance.

Time is money, and technical analysis is really helpful in timing purchases and sales. No, it's not infallible, and there is certainly an aspect of subjectivity to it.

But I truly believe that any great fundamental-oriented money manager could enjoy a dramatic increase in performance simply by employing technical analysis. An extra 2% on every round trip or even the occasional trade adds up over time. Consider the long-term benefits of compound interest on that little extra bit of performance that could be gained from technical analysis. Over time, you've got a "fundamentalist" who's outperforming his peers and making his clients very happy.

No need to choose; use both! Now let's get to those charts.

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This weekly chart of Google shows a stock that's generally making a series of higher lows. The bulls have been unable to push the stock above $500. But the longer this stock grinds away in the $450 to $500 range, the more explosive the move is likely to be when the next leg up begins. I've drawn the uptrending support line that connects the lows. I'd keep a stop just below that line to protect trading capital.

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We've looked at Rite Aid a couple of other times this year. The first time was back in February when the stock had run from around $4.40 up to $6.36 in a couple of months. The stock had gotten ahead of itself and fell through the suggested stop at the middle Bollinger Band. We looked at it again in early April when it had just poked back above the 50-day moving average.

Now, the 50-day moving average is acting in concert with a long-term trendline to support the stock. The relative strength index is consistently in the top half of the range. Looks to me like Rite Aid will continue the uptrend. You certainly could place a tighter stop just below the trendline, but I'd also consider a looser stop just below $6.

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Onyx announced earnings the other day, but the stock did not move out of a very tight trading range. When stocks are churning within such low volatility, we need to be vigilant for a catalyst that will wake traders up and start the stock moving again. The next catalyst is likely to be the American Society of Clinical Oncology's annual meeting, which kicks off June 1. (I know nothing about that stuff, but Adam Feuerstein has already started handicapping it.) I'd just need to see the stock make more of a move before I'd get involved with this sleeper. Looks to me like it could go either way.

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Ballard has been printing a series of lower highs and lower lows. But with each decline, the stock always seemed to catch buying interest right around $5. Not so anymore. The stock is now falling below $5. Because a lot of funds are precluded from owning a stock that is below $5, I'd expect some additional selling to push the stock lower.

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Double-Take is a fairly thin stock, trading an average of just a quarter-million shares each day. But the pattern is interesting. Notice how the stock gapped above the February high on almost twice average volume in late April. Since then, the stock has been consolidating that gain. I'd look at $16.25 as support on any pullback. If you're long, consider putting a protective stop just below support.

Be careful out there.

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Please note that due to factors including low market capitalization and/or insufficient public float, we consider Double-Take to be a small-cap stock. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.