Fitz Bits: Don't Buy Stocks at the Top of the Box

Today we'll look at some reader requests:

• Canadian Natural Resources (CNQ - commentary - Cramer's Take)
• Oil Services HOLDRs (OIH - commentary - Cramer's Take)
• Apache (APA - commentary - Cramer's Take)
• U.S. Natural Gas Fund (UNG - commentary - Cramer's Take)
• Chesapeake (CHK - commentary - Cramer's Take)

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 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 time frames for different things, otherwise your actions will largely be a function of your emotions.

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I've drawn a box around what seems to be the current trading range. Canadian Natural Resources looks like it's in the process of forming a base, but with a trading range of a full $20, there is a lot of room for error here. If you're long this stock, I'd suggest selling it all. And then I'd wait for a pullback to test the October low. That's when I'd buy ... with a tight stop just below $35.

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The Oil Services HOLDRs (OIH) is another stock that lends itself to a "trading box." This ETF is trading in a $20 range and is now falling away from the top of that range. Want to buy now? Go ahead -- there are plenty of folks who are selling. I'd suggest waiting for the stock to hit the bottom of the box. If it firms up again at $80, I'd buy.

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Apache is almost a carbon copy of the OIH. Again, I'd avoid this now -- it's at the top of the trading range. As such, it is a risky buy. Instead, just wait for the bears to push it down to around $65 before buying.

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I've received a lot of questions about the U.S. Natural Gas Fund over the past couple of days, wondering if this ETF is putting in a base. Is it time to buy? I don't think so. While this recent move above $30 could lead to higher prices, I respect the trend.

UNG remains in a downtrending channel with the 50-day moving average following it lower. I wouldn't buy natural gas right now; I'd wait for a retest of $27.50. If the bulls show up, I'd be inclined to join them.

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Chesapeake rose yesterday on rumors of a takeover by BP (BP - commentary - Cramer's Take). Assuming the company does get acquired, technical analysis is useless. Instead, the acquirer sets the price. But absent any takeover bid, I'd look for the next pullback to find support around $22. If the stock doesn't hold up there, then this breakout could be a big fakeout. 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.