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Today, we're going to take a look at the following stocks:
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 timeframes for different things, otherwise your actions will largely be a function of your emotions.  I've drawn two horizontal lines along this daily chart of Freeport-McMoRan to show the two relevant levels of resistance. The late-December peak was around $105, and the bulls are chewing through that right now. But the next level is the early December resistance, which looms just $3.50 higher. That makes it very late in the game to buy FCX. I'd be patient and wait for a pullback. Then I'd buy.  Yesterday, I featured Ctrip, noting that the best buying opportunity was on a breakout above $57.50. I received several emails during the day asking if it was too late to buy CTRP. Well, with the stock up 14% and right up against the December high, I'd have to say it's a bit late to buy. It's often difficult to buy a stock right when it first breaks out, because you may not trust it. But when the stock runs from $40 up to $57 in just more than a month, it pays to pounce on any sign of strength. What to do now? Wait for a pullback ... then buy.  Terra Nitrogen looks like it's just about done consolidating a massive gain and is ready to move higher. I've included the 30-week moving average in this chart, and that's what I'd use for my stop reference. If the stock falls back below that key moving average, I'd sell.  This weekly chart in Alpha Natural Resources paints a very volatile picture, with the deep dips stopping at the 50-week moving average. But two buying opportunities since last summer don't make it very appealing to say, "Hey, wait for the stock to pull back to the 50-week moving average." You may not be able to buy until we have a new president. Instead, I'd just look at the congestion around $32.50 and $35 as a plausible entry. But either way, there's just no way I'd be buying this stock now. It's just too risky.  Hologic remains above the 70-week moving average. Why the 70-week moving average? Because that's what fits! Every stock trades differently, so every stock needs to be analyzed differently. If the stock starts trading back below the 70-week moving average, then we know that the upside momentum is lagging and it's time to sell. But until that unhappy day, it's still a buy on dips.  Lindsay finally broke out above the December high. Notice how trading volume has increased with this breakout. That's what you want to see during a strong move: a wide-ranging day on very heavy volume. Stocks can fall just because there are few buyers -- they don't need volume. But for stocks to continue to advance, they typically need to be accompanied by increasing volume, because that reflects the requisite aggressiveness of buyers who are willing to reach up and take the offering price rather than wait for the seller to hit their bid. That's what we see here. This is a bit tough to buy right now. If you're long, why not try keeping a stop just below the breakout level? Be careful out there.
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. Brokerage Partners
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