Fitz Bits: A Chance to Buy Google

Today we'll look at some reader requests:

• Google (GOOG - commentary - Trade Now)
• Tessera (TSRA - commentary - Trade Now)
• Kansas City Southern (KSU - commentary - Trade Now)
• KongZhong (KONG - commentary - Trade Now)
• BP (BP - 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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Google has been printing higher highs for quite a while. I've pinpointed the various support and resistance lines, and we can see that the slopes are steepening. This latest pullback to $535 offers a great buying opportunity for the bulls. If you're buying, keep a stop around $520 -- no sense owning this stock if it falls out of this uptrend.

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Tessera fell far below the support line that propped up the stock back at $26. But yesterday's pullback to $20 could be establishing a new low. Just a few days ago as the stock gapped below support, the volume was much higher than yesterday, but we still saw volume greater than twice the average yesterday as the stock rallied off $20. If you're looking to buy TSRA, now is your chance, with a stop below $20.

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So Warren Buffett decides to buy Burlington Northern (BNI - commentary - Trade Now). What happens to other potential acquisition candidates? They move higher. Kansas City Southern rallied off the recent low around $22 and pushed back above the 50-day moving average. But the double top at $29 makes me cautious about this stock now. I'd wait for a pullback closer to support before buying. And if KSU does manage to hit $29, I'd take profits.

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KongZhong has been pretty volatile over the past several months, but one aspect has been constant -- the stock has been trending higher. Back in May, KONG was at $7; in October, it was at $16. That's a pretty big move. And after KONG pulled well below the 50-day moving average, the bulls have managed to push KONG back above $15. But what's next? Judging by the declining volume, I'd look for KONG to stall at this level and pull back a bit. If you're bullish on KONG, try buying closer to the 50-day moving average.

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Energy stocks are rallying, and BP is no exception. But disciplined entries are the key to getting off on the right foot. If you are bullish on BP, try buying just a bit right now and then waiting (and hoping) for more of a pullback to around $55. By scaling into the stock now, you protect yourself against missing the move if BP runs higher; but you also mitigate the risk of being too long if the stock pulls back. Trading is a balance between risk and reward. Strive to maintain that balance.

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.