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Today we'll look at a couple of the financials, as well as a few 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 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.  Citigroup sprung higher along with the rest of the financials. "Yeah! The financials are done moving lower and it's time to load the boat!" Well, if that's what you're thinking, try another thought. The financials have been oversold for a while and had been getting more oversold with each passing day, extending farther and farther from the mean. Stocks tend to revert to the mean sooner or later (though rarely on time), and that's what we're seeing now. Whether the current rally will be more than a dramatic oversold bounce is impossible to know, though quite easy to predict. After all, if you turn out to be wrong, just shut your mouth for a while and then make another prediction. Sooner or later, you'll be right, and can let all your buddies know how smart you are -- they'll forget about all the other times you were wrong, because any trader knows that you're only as good as your last trade, right? But rather than make a huge bet on the financials and risk it being your last trade, why not respect the trend and play it safe? Take a bit off the table now, and be a seller (but not a naked short-seller!) into any additional strength. There is way too much pain in this chart for the upside to be what many folks are anticipating.  Lehman shows a similar pattern. The stock seems to have bottomed out on Tuesday and reversed the downtrend on yesterday's move, albeit on low volume. I'd stop trying to predict the bottom and instead start looking at how much upside the trade has to it. It seems to me that another $3 or so will put the stock into the June congestion, where a lot of stock holders will just want their money back.  Most of the gold stocks are just a mess and seem to trade randomly. But this weekly chart of Yamana Gold seems to show a fairly reliable uptrending support line from which to stage a series of buys. Still, I wouldn't buy all at once because this stock is volatile. Instead, if you like the gold story (and I do), you might consider buying just a bit at around $14, and then letting it work. As folks start to understand that the free money being printed by the FOMC is inflationary, they'll start buying gold. Why not beat the crowd?  This daily chart of Apollo Group shows a stock that's making the transition from base to uptrend. Note how the stock traded down during early 2008 before churning sideways for the past three months. I'd look for a breakout above $55 to signal that the next uptrend has begun.  For all you Warren Buffett fans, you might want to check out Berkshire Hathaway, either the A or B shares. This weekly chart of BRK.A shows the stock down near mid-2007 levels, where it first broke out of a volatility squeeze. While it's usually not a good idea to try to catch falling knives, this might not be a bad entry point, as long as you keep a stop down below $105,000. If it falls that far, it'll likely hit $90,000. Be careful out there.
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.
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