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Today we'll look at some reader requests:
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.
Over the past three-and-a-half years, Gilead Sciences has remained above the 40-week (200-day) moving average. Each time the stock has pulled back to that point, buyers have seized on the buying opportunity and pushed the stock higher. We see that same dynamic playing out again. If you're long, try keeping a trailing stop just beneath the 200-day moving average. That will allow the trade to run, and get you out at the first sign of trouble.
Over the past year, Las Vegas Sands has taken a serious beating. But that beating reached its climax a couple of weeks ago when the stock hit $30. Since then, the stock has almost doubled in price. But it's now back to a reliable point of resistance -- the 50-day moving average. If you're long now, I'd suggest taking profits. And if you're looking to buy, try waiting for a pullback. If it starts firming up higher than $30, there's your buy point.
This weekly chart of GameStop shows a stock that's rolling over. After a reliable uptrend for the past few years, GME is now starting to print lower highs and lower lows. I've drawn horizontal lines along the current support and resistance levels. But you can see how the latest high failed to reach the December high. You can also see how the recent low fell below the prior low. If you're long, why not take some profits? And if the stock falls below current support, why not sell the whole thing and find a different game to play?
Agrium trades along with Potash (POT - commentary - Cramer's Take), which reports earnings today. Depending on how that stock trades, we'll see one of two things with AGU. Either the stock will fall back to test the 40-week moving average yet again, or it'll blast higher and establish $90 as the newest level of support. If you're looking to buy, you've got to hope for a big pullback so you can enter right at prior support. But if you're already long ... well, I know what you're hoping for. Just remember to sell if the stock hits the top of its trading channel.
This weekly chart of Freeport McMoRan shows a stock that's flirting with a double top. While the uptrend remains intact as the stock prints higher lows, I've drawn what sure seems to be a valid support line. If the stock falls below that level, the bulls will find it difficult to push above resistance on the next rally -- and that's a recipe for a trend reversal. If you're still long FCX, then try using tight stops to protect your profits if we do see further weakness. 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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