Fitz Bits: Wait for the Right Entry in Johnson & Johnson

Today we'll take a look at some reader requests:

• Johnson & Johnson (JNJ - commentary - Cramer's Take)
• Pep Boys (PEP - commentary - Cramer's Take)
• B.E. Aerospace (BEAV - commentary - Cramer's Take)
• Chico's FAS (CHS - commentary - Cramer's Take)
• Sykes Enterprises (SYKE - commentary - Cramer's Take)

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.

3 Stocks I Saw on TV

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 timeframe 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 timeframes for different things, otherwise your actions will largely be a function of your emotions.

This weekly chart shows how Johnson & Johnson has been all over the map! I guess you could say that the stock is in an uptrend, but the action has been so sloppy that the only traders who have really been rewarded are the patient ones.

Just wait for the stock to pull back to one of the established pullback levels -- I've got $62-$63 as a tentative buy level. Then you're buying closer to where others have been buying rather than buying where others have been selling.

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This weekly chart of Pepsico shows how the 40-week (200-day) moving average defined support during 2006 and most of 2007. But after the stock sold off in January, there has been concerted selling pressure on any push back to that key moving average. With the stock now right at support, I'd be a seller on any further weakness. And I wouldn't be buying this stock until it's back above the 40-week moving average.

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I've covered BE Aerospace before, noting key levels of support and resistance. While current resistance remains at $42.50 (the highest level the stock traded since announcing great earnings last month), I've highlighted the long volume-by-price bar between $37-$39.

With so much trading volume at this level, the financial/emotional commitment of traders is quite high. So any decline to that level is likely to produce buyers who regret missing the opportunity to buy the last time the stock was at that level. As such, I'd keep a stop just below that level because the only way BEAV will fall that far is if all those buyers we imagine being there are actually ... somewhere else!

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Chico's FAS is really looking weak. While the stock did move above the 20-day moving average, volume has been unimpressive. Also, the 50-day moving average looms right overhead. I'd use that as my reference for resistance. If the stock moves above the 50-day moving average, I'd cover any shorts. Want to know where I'd short the stock? On a drop through Thursday's low.

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Sykes Enterprises is a fairly illiquid stock, but I've had several requests to cover it, so I'm happy to oblige. After gapping up more than 10%, this stock is still struggling higher. The current short-interest is around 6% of the float, and requires almost 13 days to cover. As such, I'd imagine that much of this buying pressure is due to those shorts who are closing out their losing trades. When they're done, I'd expect SYKE to start working off this oversold rally. I'd sell if the stock falls back under $20 because I'd rather be one of the first ones out the door when the party is over.

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.