Fitz Bits: Retail Is a Mixed Bag

Today I want to check out a particular segment of the market - discount stores. It seems to me that a recession doesn't shut off the spigot of spending...it just directs it to the lower cost sources of the things people want. So let's take a look at:

• 99 Cent Stores (NDN - commentary - Cramer's Take)
• Family Dollar Stores (FDO - commentary - Cramer's Take)
• Ross Stores (ROST - commentary - Cramer's Take)
• Costco (COST - commentary - Cramer's Take)
• Ralcorp (RAH - 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.

99 Cents Only Stores is one of the few stores whose stock is moving higher. Say what you want about 99 Cents Only, but I'd rather own a stock that was trending higher than one that was trending lower. As long as this uptrend continues, I'd stay long. And I'd also continue to buy dips to the 20-day moving average.

---

Family Dollar Stores might be just one penny more than 99 Cent Stores, but the chart looks like a winner. With supply knocking the stock down each time it hits $28, the bulls keep buying the dips at higher and higher levels. Something's got to give. I'd rather buy on a pullback to $26 than wait for a breakout. But if the bulls do manage to push the stock above $28, there's a good chance that buyers will continue to pay higher prices for the merchandise.

---

Ross Stores is one stock that's on sale ... and getting cheaper. I'm not a fan of falling knives, at whatever the cost. ROST is close to an oversold bounce off prior support, but this really looks quite ominous. I'd ditch ROST in favor of FDO or NDN.

---

Costco is another stock that's cheap ... and getting cheaper. I love shopping at Costco, but I wouldn't buy this stock. The downtrend is pretty clear, and it remains a "sell on rallies" trade. Notice how the Accumulation/Distribution line at the bottom clip of the chart is persistently negative. Simply put, there is no accumulation going on - and we need accumulation to build a base. No base here.

---

Ralcorp is not a discount store. Rather, it makes a lot of the store-brand products that sell for cheaper than the name brand stuff. I'm a big fan of store-brand products for two reasons. First, I like to save money. Second, I feel pretty smart when I buy the same product for less money. So keeping more money in my pocket and boosting my self-confidence at the same time? That works for me! But would I buy RAH now? No, it's not at a favorable entry point. Instead, I'd rather wait for the market volatility to pull the stock down closer to $60. Then I'd buy.

Be careful out there.

Know What You Own: Other stocks that may interest reads of this column include Wal-Mart (WMT - commentary - Cramer's Take) and Target (TGT - commentary - Cramer's Take).

---

At the time of publication, Fitzpatrick was long Ralcorp, 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.