RACK Bounces Back

Many successful traders view trading as a competition. I am very competitive, but I find that maintaining a spirit of competition puts me too much on edge when it comes to trading.

I can't approach trading that way because I understand that my biggest opponent is me. I find I do better when I approach trading in a bit more detached manner. One method I use is to think of myself as a middleman, a facilitator.

Trading stocks is like trading any type of goods. You might trade in textiles, traveling abroad to find the best fabrics. You then buy them from the manufacturer and bring them home to sell to the end user. Lumber, diamonds or handbags -- all can be traded by simply buying from the manufacturer and selling to the end user.

When you buy from the manufacturer, you are exchanging cash for goods. The seller needs the cash to do other things, like make more goods. So you are a necessary part of his business. After you've helped the seller out, you then sell those goods to someone who really needs them. This time, you exchange goods for cash.

In the end, all you've really done is facilitate an exchange between the manufacturer and the end user. If you are good at your job, you make a nice profit for your trouble because you bought the goods for less than you sell them. Good trade!

If you aren't so good, then you wind up paying the manufacturer more for the goods than anyone else is willing to pay. Now you're stuck with goods that you don't want. Even worse, you don't have any cash to do the next deal because it's all invested in these overpriced goods. Bad trade!

Stripped to its essence, this is what stock trading is all about. It's not competitive. Rather, it's simply exchanging cash for a stock that others don't want, or accepting cash in exchange for a stock that everybody wants.

If you think of trading in this way, my bet is that you'll be much more rigorous in your pretrade analysis because you'll start to look at trading like a real business -- and you won't want to buy any goods unless you're pretty sure that the seller is anxious to take less cash than you believe the goods are worth. You'll get better entries, and will then be in a better position to sell your goods at a profit. You're not a competitor; you're just a businessman.

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Let's look at some reader picks.

Last month, Rackable (RACK - commentary - Cramer's Take) got crushed after announcing disappointing earnings. Over the past few weeks, the stock has moved higher again in response to analyst upgrades and its purchase of Terrascale.

I've drawn the lower support line at around $23, which coincides with the bottom of the July gap. I'd be a buyer on any pullback to this support level, so long as it holds. But I'd also look at $32.50 as the most likely level for selling pressure to halt the uptrend.

Over the past couple of months, the Oil Service HOLDRs (OIH - commentary - Cramer's Take) has been flirting with a break below $130. So far support has held, but the 20-week moving average is starting to move lower. If you're long, you might want to rethink that position if it falls below $130.

After a solid downtrend through the first half of 2006, bulls pushed Ford's (F - commentary - Cramer's Take) stock above the resistance line in late July. Ford advanced more than 40% before pulling back. Now, the stock is right back up against resistance.

While the uptrend could resume on a break above resistance, I believe it's way too risky to buy at current levels. The stock could pull back as far as $7.25 before we'd know whether it was still consolidating, or if this breakout was a failure. As such, I'd rather wait for the stock to fall back and test the most recent low.

Fluor (FLR - commentary - Cramer's Take) is in the process of rolling over on its weekly chart. Each time the stock has fallen to around $83, sufficient buying interest has halted the decline. If you've been riding this winner, consider that the price is only slightly higher than it was last January, and the uptrend is weakening. As noted on the chart, consider putting a stop beneath current support. That way, you don't risk getting caught in a bout of selling.

Goldcorp (GG - commentary - Cramer's Take) has been pounding away at $32, but there is still enough selling at that level to keep the stock down. At the same time, each decline is being met by increasingly aggressive buying.

Very soon, this aggressive buying will confront supply at $32 and produce either a breakout or a breakdown. I'd wait on the sidelines until the pattern resolves.

Be careful out there.

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At the time of publication, Fitzpatrick held none of the stocks mentioned, though positions may change at any time.

Dan Fitzpatrick is a freelance writer and trading consultant who trades for his own account in Encinitas, Calif. He is a former co-manager of a hedge fund and teaches seminars on technical analysis, options trading and asset-protection strategies for traders and business owners. Fitzpatrick graduated from the McGeorge School of Law and was a fellow at the Pacific Legal Foundation, a nonprofit public interest firm specializing in constitutional law. He also practiced law in the private sector before pursuing trading as a full-time career. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While Fitzpatrick cannot provide investment advice or recommendations, he appreciates your feedback; click here to send him an email.