Fitz Bits: Put the Brakes on for GM

Today we're look at some reader requests:

• General Motors (GM - commentary - Cramer's Take)
• SPDR Homebuilders (XHB - commentary - Cramer's Take) ETF
• KB Home (KBH - commentary - Cramer's Take)
• Altria (MO - commentary - Cramer's Take)
• Infinera (INFN - 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.

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 time frames for different things, otherwise your actions will largely be a function of your emotions.

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GM is quickly rising from the dead. Last Thursday you would have paid more for a bottle of Two Buck Chuck at Trader Joe's than a share of GM. But the market is starting to believe that the Big Three just might be able to ring in the New Year after all.

The stock is rallying, but I'd be careful about buying now. Notice how the downtrending resistance line is coming increasingly close to the current price action. So the upside is limited relative to the risk of buying now. Try waiting for another dip. In this market, that'll probably happen sooner rather than later.

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Has the homebuilding sector finally bottomed? I doubt it. But last week's reversal of the SPDR Homebuilders (XHB) was impressive and has rewarded the dip-buyers. But think about it for a second. It's going to be quite a while before these companies start making some money. Now, I know the market likes to anticipate these things, but I don't think it looks that far ahead! I'd continue to sell into any strength.

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Look closely at Friday's price and volume data in this daily chart of KB Home. That long tail that reflects Friday's intraday reversal gives me the distinct sense that the bulls have finally capitulated. On Friday, volume was nearly twice average volume while the intraday selloff was rejected by a rush of buying. And yesterday, we got some dramatic follow-through with a 20% advance in price. While KBH might be poised to move even higher, I have a real problem buying a stock after a 20% advance. Instead, I'd rather wait for a retest of Friday's low. Even a pullback to $8 would be an enticing entry point.

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While Altria is supposed to be a defensive stock, it's sure not behaving that way. The theory is that folks will continue to smoke even during an economic downturn. But this daily chart of MO shows the stock continuing to drift lower, with each move up to the 10-day moving average offering another chance to sell. At some point, this dynamic will change. But until it does, I'd stay off the smokes.

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Take a close look at the volume in yesterday's breakout of Infinera. While it is above average, it's also lower than the prior day. That's not an encouraging development for the bulls -- you typically want to see an increase in volume on a breakout. If the volume isn't high, you can attribute the rally to a lack of supply rather than a big increase in demand. If you're long, try keeping a tight stop just below the 50-day moving average.

Be careful out there.

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Know what you own: Fitzpatrick mentions homebuilders. Other companies in the industry include Pulte (PHM - commentary - Cramer's Take) and Meritage (MTH - commentary - Cramer's Take).

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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.