Fitz Bits: Merck Is Poised for a Breakout

Today we'll look at some reader requests:

• Merck (MRK - commentary - Trade Now)
• Huntington Bancshares (HBAN - commentary - Trade Now)
• Manitowoc (MTW - commentary - Trade Now)
• Infinera (INFN - commentary - Trade Now)
• Synovus (SNV - 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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Merck looks poised to break out of a monthlong consolidation pattern of higher lows and lower highs. I'd look at $31 for support and about $32.50 as a breakout confirmation. Also, don't overlook the key 50-day moving average, which continues to define the bottom of each pullback. MRK is now just about 65 cents above the current reading for the 50-day moving average.

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Huntington Bancshares has consistently stalled around $4.75 or so, but each of the last few pullbacks has been higher than the last. This points to more bullish buyers, who seem to view any pullback to the 50-day moving average as a buying opportunity. If you're buying, consider either waiting for the next pullback to support, or for a breakout above resistance. Until then, HBAN is mired in congestion.

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After breaking out of a volatility squeeze in early September, Manitowoc really took off and advanced about 50% before pulling back. But yesterday's 13% move has taken this stock back up to test resistance, making MTW a risky stock to buy. If you're bullish on this company, at least consider waiting for a pullback to test support. At this level, there are lots of regretful bulls who bought at higher levels -- they're bummed, and would love to sell at "break even."

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Infinera has defined "volatility" for the past few weeks. After zooming up to $9, the stock has fallen back to around $7 before advancing 5% just yesterday. If you're bullish on INFN, take heart -- there are a lot of different support levels, ranging from $6.50 up to $7.18. But if you're new to the stock, you might consider starting small and building a position slowly. On a percentage basis, INFN could fall quite a bit before you'd know if you were wrong ... or just early.

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Synovus is another stock that has been trading in a very wide range. I'm big on risk management these days, and I'd look at $3.25 as viable support and keep a stop below that level. And if I were long (I'm not), I'd look to take profits at $4.50, which has proved to be pretty strong resistance on three separate occasions since early August.

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.