Fitz Bits: Bide Your Time on Baidu

Today we'll look at some reader requests:

• Baidu (BIDU - commentary - Trade Now)
• Walgreen (WAG - commentary - Trade Now)
• Devon (DVN - commentary - Trade Now)
• Apple (AAPL - commentary - Trade Now)
• SanDisk (SNDK - commentary - Trade Now)

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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Baidu has more than doubled since the January low, but the stock has been pretty flat over the past month. With resistance right around $300 and the last support level around $270, the best action is no action at all. The current price is right in the middle of support and resistance, so there's not much to do except wait. But while you're waiting, consider checking out other stocks in this space. Stocks like Google (GOOG - commentary - Trade Now), Yahoo! (YHOO - commentary - Trade Now), Sina (SINA - commentary - Trade Now) and Sohu.com (SOHU - commentary - Trade Now), aren't doing too well, so I'm not particularly optimistic that BIDU will break away from the herd.

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Notice how Walgreen peaked in early May and has been grinding sideways for the past two months. During a sideways channel like this, the big question is always the same: Is this consolidation before another leg higher ... or is this a top? I think last week's pullback gave us our answer, as the buyers seem to be done and the sellers are just getting started. If you're looking for a short candidate, this should be on that list.

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I last covered Devon last week, noting that the stock was trending lower and that the next logical level for buying was at $52.50. But as a reminder, I'm not big on being at the front of the line to buy a downtrending stock. Instead, I'd like to see evidence that buyers are really stepping up to take the stock and are establishing new support at $52.50. As such, I wouldn't be a buyer here. And considering the weakness of the entire group, I'd still think twice (or three times) before buying DVN on any bounce.

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Apple has been a leader in the technology sector for quite some time. While current supply is pretty heavy at $145, buyers continue to soak up any pullback. I'd respect the uptrending support line and would look to buy on the dip.

But you've got to understand that the entire market is rolling over, so don't give this one too much room. As the third quarter begins, traders will be looking for new themes, and that might mean getting out of the AAPL trade for no reason other than to raise cash. That could be all we need to see the uptrend broken.

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SanDisk really peaked in early May, and has been struggling ever since. While the bulls retested $16 in June, notice how the accumulation/distribution line has been trending lower. Simply put, SNDK has been under distribution for the last couple of months, and the most recent lower high confirms the lack of buying pressure. A break of support would reverse the uptrend and put me on the sidelines. But come to think of it, I wouldn't even wait for the breakdown -- I just wouldn't own SNDK right now.

Be careful out there.

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At the time of publication, Fitzpatrick had no positions in the stocks mentioned, 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.