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Today we'll look at some reader requests:
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.  Ford has been climbing the "wall of worry" over the past few weeks as the stock rallied from $7 to $9, taking the stock back above the early-August high. But notice the volume characteristics on this stock. Back in late July, Ford was on a tear, rallying from $5.50 up to $8.50 on very heavy volume. But the resulting peak in price corresponded with a peak in volume. The aftermath was not pretty, as the stock fell back down below the 50-day moving average. We're seeing a similar dynamic play out now, as the stock has peaked on high volume, but that volume is tapering off along with the price decline. So I'd be patient here. A 40-cent pullback isn't much of a pullback. Try waiting for a test of $8 before you think about buying. If Ford firms up there, then it's probably worth a shot.  This daily chart of Exco Resources reveals a very reliable pattern of bottoms. Each time the price falls to the 200-day moving average, it is bought. So I'm using Thursday's intraday low and Friday's advance as the next signal to buy. Yes, I see the lower high in mid-November, but that is not as compelling as the current entry point. With the ability to establish a tight protective stop that makes sense, we'll deal with the last high at $18 when the stock reaches that level. Until then, I'm just respecting the pattern.  Johnson Controls is in a well-defined channel. You can see the last several peaks and troughs occurred between $24 and $28. And with such a recognizable trading pattern, are you really considering buying just because the stock is down for three consecutive days? I wouldn't! Instead, I'd wait for more of a pullback. Be patient. If JCI falls below $25, that's your buy point.  Biogen Idec has been extremely volatile over the past couple of months, but that volatility is really tightening up lately as the stock consolidates a $5 gain since late October. This mild pullback on declining volume is known as a "bull flag." I'd wait for the resolution of this continuation pattern before buying. A move above $47 would be my buy signal.  During strong uptrends, I'll often focus more on resistance than support. Why? Because the first sign of weakening upside momentum is typically a high that does not tag the resistance trend line. But this daily chart of GOOG does not really fit the pattern. Check out the July-September resistance line. That trend line was actually broken in October as the upside momentum increased. And given the steepness of that rally, I would not expect that momentum to persist. If GOOG falls back to the 20-day moving average -- which has defined support for the past five months -- I'd be a buyer. Be careful out there.
At the time of publication, Fitzpatrick was long XCO, 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. Brokerage Partners
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