Fitz Bits: Devon Is Dangerous

Today we'll look at some reader requests:

• Devon (DVN - commentary - Trade Now)
• Texas Capital (TCBI - commentary - Trade Now)
• Mosaic (MOS - commentary - Trade Now)
• First Solar (FSLR - commentary - Trade Now)
• Rackspace Hosting (RAX - 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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Devon fell out of a rising wedge with converging highs and lows. This type of formation is the result of persistent supply that easily fills all demand for the stock. At some point, the demand is satisfied and the stock starts falling as a result of its own weight -- that's what's happening now. I'd watch for buyers at $52.50 before stepping in front of DVN. Until the bulls show themselves, this one is a dangerous buy.

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Texas Capital is still within a narrowing trading range despite Friday's rally on dramatic volume. While it might be tempting to buy in anticipation of a breakout, I'd stand clear until either the bulls manage to muscle the stock above $16 or the bears can push the stock back down to the 50-day moving average.

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Mosaic has really been a mess over the past couple of months. After a mid-May breakout above $47.50, the stock ran another 25% before peaking. Since the late-May peak, MOS has been under big selling pressure and has fallen back into the middle of the old channel between $37.50 and $47.50. Considering the high degree of pain being felt by those who bought at higher levels, any rally will have to chew through a lot of resistance.

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First Solar is close to filling the late-April gap between $150 and $180. Notice how the stock remained above $180 as each pullback was met by aggressive buyers, but each rally peaked at progressively lower levels, revealing increasing supply. After breaking below $180, the rout was on. I'd stand aside unless First Solar finds support at $150. And even then, I'd be careful. As in MOS, the regretful bulls who bought at higher levels are not particularly happy right now, and they'll be happy to sell into strength.

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Rackspace Hosting advanced more than 300% between February and June. For a while it looked like the uptrend would end at $13, but the stock really popped on Friday and the bulls look like they want more. Don't forget that more than 17% of the float is short. While it's always prudent to sell into strength after this kind of pop, I'd prefer to keep a tighter trailing stop and give the position a chance to run.

Be careful out there.

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Please note that due to factors including low market capitalization and/or insufficient public float, we consider Texas Capital to be a small-cap stock. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.

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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.