Fitz Bits: Wait for a Pullback in USO

Today we'll look at some reader requests:

• U.S. Oil (USO - commentary - Cramer's Take)
• Halliburton (HAL - commentary - Cramer's Take)
• Schlumberger (SLB - commentary - Cramer's Take)
• Chesapeake Energy (CHK - commentary - Cramer's Take)
• Diana Shipping (DSX - 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 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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Oil sure looks like it's put in a bottom. This daily chart of the U.S. Oil ETF shows how the downtrend fell below $30 in late December only to see a dramatic rally on extremely high volume. But with this ETF now back at prior resistance at $40, the safest trade is to simply wait for a pullback before buying. If the bears can push USO down to the low $30s, I'd start scaling in!

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This daily chart shows Halliburton just completing a three-month bottom with a rally back above $20 on increasing volume. I think the stock will move higher from here, but I'd protect that position with a stop just below the 50-day moving average at $19.

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Schlumberger is a bit behind Halliburton, not yet moving above prior resistance at $50, and not yet breaking above the 50-day moving average. But the stock has rallied more than 25% in less than two weeks, so I'd certainly avoid buying now. Instead, I'd wait for profit-taking to start pushing the stock lower and look to buy as close to $40 as possible. The way oil is acting, we'll be lucky to get a pullback that deep.

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Chesapeake Energy looks like it bottomed back in early December. But that trade is now history -- the is stock up 100% since then. With current support at $15, and the current price at $19, it doesn't take a mathematician to know that the stock is up more than 25% above support. That's just too risky for me. Instead of buying now in anticipation of a breakout, I'd stand aside and wait for a pullback closer to support. Then I'd buy.

And if the stock instead continues moving higher, I'd be tempted to buy the breakout ... but only with a very tight, trailing stop.

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I've highlighted the significant turns on this daily chart of Diana Shipping. While the stock is close to completing a bullish inverse head-and-shoulder pattern, the volume is a bit suspect. If this rally is to continue from here, we need to see more volume on the breakout. If that happens, I'd buy. If not, I'd stay off the boat.

Be careful out there.

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Know what you own: Fitzpatrick mentions Chesapeake Energy. Other companies in the 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.