Fitz Bits: Construction Stocks Sit on a Shaky Foundation

After receiving several emails about various stocks in the heavy construction group, I've decided to feature five of them in today's column.

• Foster Wheeler (FWLT - commentary - Trade Now)
• McDermott (MDR - commentary - Trade Now)
• Joy Global (JOYG - commentary - Trade Now)
• Bucyrus (BUCY - commentary - Trade Now)
• Shaw Group (SGR - 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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Foster Wheeler had been trending up in a series of higher highs and lows before breaking down earlier this month. The current consolidation is far from clear. Is demand at $23 strong enough to soak up all the supply created by those who bought at higher prices and wish to sell? If so, FWLT is likely to churn around for a while before moving higher. But if support breaks down, I don't think it'll take any time at all for sellers to push this stock below $20. So I'd be careful with Foster Wheeler now. Don't give it too much leeway if it falls below your buy point.

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This break of support in McDermott is similar to that on the chart of FWLT. Notice how demand has not been sufficiently aggressive to push the stock back to test the breakdown. This effectively puts MDR in the penalty box. If the stock rallies up to around $22, I'd look for more selling by all those folks who bought in early June at higher levels. And if the bears push MDR down below $18, I'd look for much lower prices.

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Joy Global is another heavy construction equipment stock that's showing the same pattern of a lower high after peaking in early June. But unlike in FWLT and MDR, we can see a clear return to a prior breakout level of $32.50 followed by a high-volume snapback rally off that same level. JOYG is not at an ideal buy or sell level now. Rather, it's right in the middle of the current $10 range. If the current rally falters at $37.50 -- as it is appearing to do -- I'd avoid buying the pullback unless buyers reassert themselves at $32.

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Bucyrus also broke support a couple of weeks ago. The current rally is struggling to push above $30. At the risk of confusing the uninitiated, a breakdown below $25 would transform the current $25-to-$30 rally to the right shoulder of a bearish head-and-shoulder pattern, with $25 as the neckline. As such, I'd suggest watching $25 very closely. If the stock falls below that level, consider this uptrend in real trouble and stand aside.

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Shaw Group continues to peak at the 200-day moving average while attracting buyers at $27. This convergence of support and resistance will lead to a resolution of the sideways channel. I'd suggest watching the other stocks in the heavy construction group for a hint at the outcome. If they remain weak, I'd be a seller here.

Be careful out there.

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At the time of publication, Fitzpatrick had no position sin 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.