Fitz Bits: Careful With Those Chips

Today we'll look at some reader requests:

• Dow 30
• Semiconductor HOLDRs (SMH - commentary - Trade Now)
• Morgan Stanley (MS - commentary - Trade Now)
• Amazon (AMZN - commentary - Trade Now)
• NutriSystems (NTRI - 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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The major averages are all at critical price levels now as traders consider whether to buy this dip or take profits before a deeper pullback. I'm not smart (or brave) enough to predict which way the Dow 30 is going, but I am prudent enough to assess the risk. I'd look for support at around 9680. If the Dow closes below that level, I'd clear out.

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The semiconductors have been pretty weak over the last few weeks. Notice how the Semiconductor HOLDRs are back to test the August low. But here's the problem. Since mid-August, the 50-day moving average has turned south, and the current price is now below that key moving average rather than above it. That's a turn for the worse, and I'd be careful of this ETF. If you're a buyer, try keeping a stop just below current support at $24.

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Morgan Stanley has been grinding higher in a series of higher highs and lows. Notice how the stock has tagged a rising support line four times over the past few months. That evidences aggressive buying as bulls refuse to wait for the prior low to be tested. Yesterday's intraday low of around $31 sets the current low. I'd keep a stop just below that level and stay long. My bet is that the trade will pay off.

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After Amazon stunned Wall Street with stellar earnings, the stock gapped from $95 up to $110. But I think patience is about to pay off. Rather than chasing the stock, the prudent move was to just remain patient until the strong bids dried up. I'm looking for a buy point of about $110. If the stock pulls back to that level, this is a stock I want to own.

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This weekly chart shows NutriSystems in what is probably the early stage of a volatility expansion. After the stock popped above $16 resistance, the bulls put on another $6 in a matter of weeks. I'd look for more upside from here, but I'd protect profits with a tight trailing stop.

Be careful out there.

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At the time of publication, Fitzpatrick had no positions in 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.