Switch Gears to Long-Term Trades

My longer-term account is doing a lot better this month than my short-term trading account. This isn't a surprise, because the thin August environment is better suited to long-term positions than to quick scalps or one-day wonders.

That's what I like about swing trading. The strategy lets me choose a spectrum of holding periods that match current market conditions. That's one reason I spend a good deal of time looking for stocks to hold for weeks instead of minutes or hours.

This is a great time to take a giant step back and find patterns on the weekly charts. But watch out, because there's broad territory between weekly closing bars. Manage this risk by combining the best of investing and trading techniques.

For example, build positions over time using dollar-cost averaging, but align your entries with larger-scale support and resistance levels.

Let's take a look at promising long-term patterns on five S&P 500 components. Just keep in mind that timing is everything with these trades, so be patient and wait for the stock to "come in" to your limit entry price.

Agilent Technologies

Agilent Technologies (A - commentary - Cramer's Take) broke out above a nine-month base last week and rallied to $31 on heavy volume. It's now starting to pull back and test the breakout level. This decline should last several weeks at a minimum. The stock should be a good buy as price fills the territory between $27 and $29.

Notice what happened the last two times this stock got above the mid-$20s. In rallies that started in 2001 and 2003, price pushed all the way to $38 before it ran into substantial resistance. This suggests the current uptick will reach that level some time in the fourth quarter.

E*Trade

E*Trade (ET - commentary - Cramer's Take) hit an early 2001 high at $15.38 in a countertrend bounce during a persistent decline. It returned to this level twice in 2004 but was turned away both times. The stock pushed back to resistance several weeks ago and moved above it earlier this month. This completes a five-year base breakout.

The next substantial resistance lies in the lower $20s, where the stock broke down from an April 2000 topping pattern. This marks a good price level to take profits on long-term positions. How long will it take for price to rally into this level? Prior movement through the same territory suggests a time target of six to 10 weeks.

BMC Software

BMC Software (BMC - commentary - Cramer's Take) has been grinding sideways in a massive symmetrical triangle for the last four years. The stock rallied to pattern resistance two weeks ago and has been congesting at this price level. This suggests it could finally break out into its first uptrend since 1999.

This is a tough one, because it's dangerous to be early with new positions. Buying within the pattern exposes risk all the way down to the lower teens. The best plan is to stand aside and wait for a move over $22. Building a long-term position close to that level offers attractive reward-to-risk profile for a rally that could reach the lower $30s by the end in early 2006.

Nvidia

Let's look at the monthly pattern of Nvidia (NVDA - commentary - Cramer's Take), which I highlighted in Tuesday's column. Notice the developing cup-and-handle pattern going back to early 2003. The stock has been consolidating near those two-year highs for the last seven months.

Nvidia should move higher once it finds the sponsorship needed to spring off this contested level. Look at the angle of the decline from the 2001 high. In theory, the stock will rally at the same angle of attack once the uptrend gathers momentum. This suggests it could reach a first reward target near $40 in the next few months.

Scientific-Atlanta

Scientific-Atlanta (SFA - commentary - Cramer's Take) declined from $94 to $10 during its steep bear-market decline. It recovered about a third of its former value in 2003, before the rally stalled out. The stock has been moving sideways since that time in a broad rectangle pattern.

Price rallied to resistance three weeks ago and has been pulling back since that time. If it can stabilize here, it might break above long-term resistance and resume its uptrend. Put this one on your watch list and wait for a move above $39. That could signal the start of a rally into the mid-$60s.

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Alan Farley is a professional trader and author of The Master Swing Trader. Farley also runs a Web site called HardRightEdge.com, an online resource for trading education, technical analysis and short-term investment strategies. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Farley appreciates your feedback; click here to send him an email. Also, click here to sign up for Farley's premium subscription product The Daily Swing Trade brought to you exclusively by TheStreet.com.

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