Fitz Bits: Baidu Is Eating Through Supply

Today we'll take a look at some reader requests:

• Baidu (BIDU - commentary - Cramer's Take)
• Deere (DE - commentary - Cramer's Take)
• Quanta Services (PWR - commentary - Cramer's Take)
• Foster Wheeler (FWLT - commentary - Cramer's Take)
• Freeport-McMoRan (FCX - 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.

3 Stocks I Saw on TV

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.

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Baidu has been slowly chewing up all the supply at $380. The pullbacks aren't scaring the buyers away, and the stock continues to churn in a tight range. I'd watch for a close above $380 and then I'd buy.

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I get a lot of emails about Deere, and this weekly chart shows the same setup that I covered a few weeks ago. The 40-week moving average continues to define the extent of the pullbacks. If DE breaks down below that key moving average, I'd be a seller.

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The bulls were unable to push Quanta Services up above $32 in 2007, and I think it's going to be just as tough this time around. Such a steep rally begs for a rest, and any weakness is likely to trigger a lot of profit-taking. I'd be patient and wait for a pullback to the mid-$20s. Then I'd buy.

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Foster Wheeler looks a bit like Quanta Services, only within a tighter timeframe -- a series of lower lows and horizontal resistance at around $80-$85. As with PWR, I'm always suspicious of steep rallies back to prior resistance, because it takes so much buying interest to bring the stock up to the level where it can actually test resistance. By the time it meets resistance, much of the buying pressure has been exhausted. I'd wait for a pullback before buying.

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Freeport-McMoRan looks like it's breaking out of a volatility squeeze between $110 and $120. Volume is perking up a bit, but still not enough to make me too enthusiastic about this right now. If the bulls are committed to buying on any weakness, then any pullback should not fall much below $120 because of the buying interest. So that's where I'd keep my stop.

Be careful out there.

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At the time of publication, Fitzpatrick was long Baidu, 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.