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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.
In January, Apple fell off the tree. Over the past few weeks, the stock seems to have finally hit the ground as it churns between $120 and $130. But in light of such an obvious support line, I'd suggest protecting your long position with a tight stop just below $120. That's where the battle will be waged.
Cogent has been in a downtrend for quite a while. Last week's surprise rally above the 50-day moving average failed miserably over the next few days. Now the stock is once again testing $9 as support. For the bears, the third time could be the charm. If they can push the stock below $9, I'd be a seller.
Notice how the 50-day moving average became relevant back in October when Bank of America broke below that key moving average. In December, the 50-day moving average capped the rally. Finally, during February, the bulls continually bought the stock when it pulled back to the 50-day moving average. So what now? That key support level has been busted on increasing volume. The path of least resistance is down; if you're short, consider covering around $34 or so. And if you're long, why?
There is a lot of pain in this chart of Medco Health Solutions. The stock took a 20% haircut in just two weeks, falling from $52 down to $42. But Tuesday's reversal could be the first step in a recovery. But before you get all hopped up to buy this thing, consider this: For every seller, there has been a buyer. So, there are a lot of folks who own this stock from higher levels. Any rally will probably entice them to sell. So if you like MHS, be patient -- you'll probably be able to buy it at these levels for quite a while. And if you're short ... well, your buddies just covered on Wednesday.
JAKK's Pacific has rallied more than 30% off the January low on increasing volume. Over the past couple of weeks, we've seen some consolidation of that move right around where prior resistance had kept the stock down during the last quarter of 2007. This type of consolidation is known as a "flag" pattern. Until the stock breaks out of the top of that flag, I'd sit tight. Oh, and if the stock breaks below the support line I've drawn, then get out because the move is probably over.
I've zoomed in on this daily chart of Gafisa to illustrate the past two days of trading. Notice how Wednesday's price action gapped above Tuesday's intraday high ... and then closed below Tuesday's intraday low. This is known as a "bearish engulfing pattern" because the current price bar literally "engulfs" the prior price bar. And since volume was also quite heavy, I'd heed this signal and avoid the stock. With the last breakout down around $36, that's where I'd expect to see some buying pressure. Until I see that level tested, I'd stay away. 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.
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