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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 time frames for different things, otherwise your actions will largely be a function of your emotions.  This daily chart of the S&P 500 shows how this key index repeatedly bounced off 850 in October and November. But after the late-November test of 750 and subsequent ill-fated rally, it turns out that the bulls were running on empty. Now, the bears are back in charge, and I'd continue to sell the market on rallies ... and be pretty darned coy about buying it on dips. No question about it -- lots of selling pressure remains, and until that changes, the S&P will continue to struggle. Don't struggle with it! Instead, just deal with the market that "is" rather than the market that "was."  This monthly chart really tells the tale for Microsoft. The stock is back down at the same levels that it reached after the last bubble popped. But this time, we don't have a growing real estate industry to buy all those extra copies of Windows and Office. As such, I'm looking for MSFT to ultimately break below $17.50, but this Dow component just might be good for one more oversold bounce before it falls lower.  If you bought Citigroup on the pullback last month, you'd better sell now. It's simple -- don't be a pig. Just take your blood money off the table. But if you're standing on the sidelines looking for an entry, consider any pullback to $5 as a starting point. Would I short it? No way! All of us taxpayers are throwing trillions around, trying to save the financial markets. Citi is a big beneficiary, and I don't like to bet against the ability and willingness of the U.S. government to spend two or three generations deep in keeping Citi alive.  Notice how the downtrending channel in this daily chart of Joy Global is well below the 50-day moving average? This is what a stock looks like when it's under persistent distribution. While selling yesterday morning was the better trade, I still think you'd be better off selling now, and looking to buy it back on another 25% decline to $15.  Notice the relationship of Jacobs Engineering to the 50-day moving average vs. that of Joy Global. While JOYG continued to trade well below the 50-day moving average, JEC is showing some signs of strength. Last week the bulls managed to push the stock above the 50-day moving average. That's no small feat, because it indicates that the price is reverting to the mean -- that is, the stock has been trading sideways for a sufficient period to relieve any oversold condition. And by the way, this engineering company manages big infrastructure projects around the globe. It just might be worth another look on a deeper pullback. I'd look to buy if the stock hits $30. Be careful out there. Know what you own: Fitzpatrick mentions Jacobs Engineering. Other companies in the infrastructure industry include Foster Wheeler (FWLT - commentary - Cramer's Take), McDermott (MDR - commentary - Cramer's Take) and Shaw Group (SGR - commentary - Cramer's Take).
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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