Fitz Bits: Don't Stall on Research In Motion

Today we'll look at some reader requests:

• Research In Motion (RIMM - commentary - Trade Now)
• Visa (V - commentary - Trade Now)
• Abbott Laboratories (ABT - commentary - Trade Now)
• Procter & Gamble (PG - commentary - Trade Now)
• Altria (MO - 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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After bouncing off $55 earlier this month, Research In Motion rallied all the way back to $65 to test the early October low, but predictably, the bulls ran into a lot of sellers eager to execute the "I just want my money back" trade. That selling defined the current resistance trendline that marks the top of the range. What we've got to do now is be vigilant for the next sign of support on this pullback. I'm watching the $60 level. If Research In Motion bottoms at that level, we've got a higher low. That higher low will provide a base from which the bulls can spring higher and push through $65. Look, the stock has been trounced pretty soundly, but the company is solid. The stock is in a base-building mode now with lots of resistance looming overhead, but ultimately this former market-leader will start rewarding those who are patient. Ignore Research In Motion at your own risk. Any breakout above $65 gives the bulls the green light.

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Visa is in a well-defined uptrend. Aside from the late-September selloff that briefly took the stock below the 50-day moving average, support is solid, and it has paid to buy tags of the trendline. But that's now clear down at $75. As such, Visa is at a high-risk level right now. I've highlighted the distance between the 50-day moving average and the recent peak in price. It's important to track these types of dislocations because they indicate the intensity of short-term buying vs. selling activity. Persistently aggressive buying pushes a stock far above a key moving average. And that type of aggressiveness is finite; it is short-lived and will ultimately wane. At that point, the stock begins falling simply as a function of a decline in aggressive buying. This is what's likely happening to Visa right now, so I'd be prudent here and wait for the stock to fall back closer to the 50-day moving average. When you buy close to support, you've got a better risk-reward profile for your trade.

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Jim Cramer pitted Abbott Laboratories against Johnson & Johnson (JNJ - commentary - Trade Now) last week in his "Off the Charts" segment. From my technical perch, Abbott won. Why? Because the stock has been marching higher while Johnson & Johnson has been churning below $63. We'll check in on Johnson & Johnson tomorrow, but today, let's focus on Abbott. This major drug manufacturer ran about 8% within two weeks before stalling just below $54. Here's how I'd buy Abbott now. First, if the stock firms up at the last resistance level of $52, I'd buy just a bit, but I'd plan to buy more on any pullback to test the 50-day moving average (currently around $50). Using this two-pronged approach, I'm covered. If the bulls start running and Abbott does not fall back to $50, at least I've got a position that's making money. But if the bears push the stock back down to $50, that small initial position doesn't hurt me, and I've got more capital to exchange for stock down at $50.

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Procter & Gamble had been topping out at around $58 during September and October, but the bulls finally chewed through that supply on a breakout to $60. The stock is now consolidating a nice gain, and I'd use the same type of approach as I just outlined with Abbott. First, I'd look to buy some under the assumption that Friday's intraday low will hold as support. However, I'd also plan to buy more down at the 50-day moving average in the event that Friday's support does not hold up. So, again, I'm covered irrespective of the direction of Procter & Gamble. If it rallies from here, I'm in. If it instead pulls back from here, my initial position is not painful, and I can plan on buying more at a lower level, thereby lowering my cost basis in this stock.

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What do you do when you're worried about your job? Why, you light one up, of course! Since bottoming in the first quarter of last year, Altria has been marching higher in a series of breakouts followed by consolidation. I'd be leery of buying this stock right now. Instead, why not let it consolidate some gains and wait for some weakness? Sooner or later, the market will pull back; and Altria will pull back with it. Any test of $18 is where I'd get interested.

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.