Fitz Bits: Apache Has Limited Upside

One dynamic that is occurring with increasing frequency is the impact of the 50-day moving average on the short-term advances. Traders are creatures of habit -- they'll do the same thing again and again as long as it works. It has worked to buy extreme dips and sell at the 50-day moving average. Check out the interplay between the 50-day moving average and the power of the bulls in these charts.

• Apache (APA - commentary - Cramer's Take)
• Chesapeake (CHK - commentary - Cramer's Take)
• Diamond Offshore (DO - commentary - Cramer's Take)
• Dominion (D - commentary - Cramer's Take)
• Petrohawk Energy (HK - 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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The symmetrical triangle in Apache is a "continuation" pattern, meaning that banking on the continuation of the prevailing trend is the high-probability trade. This means that the probable resolution of this pattern is downward. That's fine -- but we're not playing cards here. We're trading. So I'd focus on risk rather than probabilities.

If the bulls push the stock above resistance, the 50-day moving average looms overhead. That would tend to cut our expected profit down quite a bit. How about a downside resolution? Watch the rest of the energy sector. If all the other little Indians are heading south, Apache will likely follow. But until you see a resolution one way or the other, I think you have to stay put.

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Chesapeake continues to advance after a high-volume bottom in early October. Since then, the stock is moving higher in a series of higher highs and higher lows. That's bullish, and the stock is right at a low-risk buy point, with support just below current levels. The upside on the trade is likely about $6 -- with a sell order at the 50-day moving average. Downside? About $3 lower. That's a 1-to-2 risk-reward situation.

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The 50-day moving average has capped each of the last two rallies in Diamond Offshore. Now the stock is firming up at a higher low, just about $10 below the 50-day moving average. That's my upside if I'm a buyer here. And the downside? I'd keep a stop just a bit below $70. If the stock falls that far, then I'm not so confident in $70 as support.

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Dominion looks a lot like Apache -- churning sideways in a pattern of lower highs and higher lows, with the 50-day moving average looming overhead. Once again, I'd be very careful of buying right now -- the upside is likely to be limited.

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Petrohawk Energy is probably the best of the bunch, with the current congestion occurring quite close to the 50-day moving average, which affected the bulls back in August. I'd look for any breakout above the 50-day moving average to have some legs simply because the stock won't be overbought by the time it breaks out. Rather, it will have a tight base from which to spring higher.

Be careful out there.

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Know what you own: Fitzpatrick mentions Apache. Other companies in the independent oil and gas industry include Occidental (OXY - commentary - Cramer's Take) and Devon (DVN - commentary - Cramer's Take).

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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.