Charting Cramer's Dow Forecast

This column was originally published on RealMoney on Jan. 8 at 11:30 a.m. EST. It's being republished as a bonus for TheStreet.com readers. For more information about subscribing to RealMoney, please click here.

Editor's Note: This is Part 1 of Dan Fitzpatrick's technical review of the prospects for the stocks that make up the Dow 30. Be sure to read Part 2, Part 3, Part 4 and Part 5.

Jim Cramer recently shared his 2007 forecast on the 30 stocks that make up the Dow Jones Industrial Average. In basic terms, Jim focuses primarily on the company and not the stock. If you like the way a company does business, and you also like that business, you might buy the stock. Of course, he takes a lot of other things into account -- but he never buys a stock because "the chart looks good."

I believe there is a place in any approach for sound chart analysis. No matter how focused you are on fundamentals, if some effective chart analysis helps you buy a stock even 1% lower and sell 1% higher, those little numbers add up. Performance can be further enhanced by adding the time element into the equation.

So to complement Jim's fundamental work, over the next week I'll be looking at charts of all 30 Dow components, breaking down six each day. To spice things up, I'll be doing momentum and volume analysis on each of these stocks.

I'll use RSI to gauge momentum and will also use two types of volume-based indicators, one closed and one open. The Chaikin money flow (CMF), which is intended to detect whether money inflows or outflows carry the most intensity, will be the "closed" indicator, meaning that it parses only the most recent price and volume data -- here, the last 10 days. So essentially, it's a 10-day moving average of money flow.

For the "open" indicator I'll use the accumulation-distribution line ("A-D line"). This indicator breaks down volume according to whether the close is up or down relative to the prior day. Unlike the closed indicator, which uses only recent data, an open indicator sums all the data. While it is a slower, lagging indicator, it can be helpful in detecting meaningful accumulation or distribution.

And of course I'll study how the price is moving within Bollinger Bands. Bollinger Bands are effective reference points for gauging price movement. They are two standard deviations above and below the simple 20-period moving average. In statistical terms, 95% of price values will fall within two standard deviations of the average price value. As such, 95% of all price action should fall between the Bollinger Bands. How high or low the prices peak within the Bollinger Band complex gives us excellent information about the strength or weakness of price moves.

Bollinger Band analysis is itself a separate topic. I use them extensively and have written a lot about them over the past five years. But if you'd rather not sift through about a thousand articles, just buy Bollinger on Bollinger Bands, which is quite accessible to beginning and advanced chartists.

Now let's take a look at the first six Dow components: Alcoa(AA), American International Group(AIG), American Express(AXP), Boeing(BA), Citigroup(C) and Caterpillar(CAT).

Alcoa is one choppy chart. The price has fallen back below the 50-day moving average and is oscillating between the lower and middle Bollinger Bands. That's bearish action. The other indicators are confirming the weakness in the stock. RSI is now peaking at the midline. That's not good, because during uptrends, the midline often acts as support. Also, money flow has been spending quite a bit of time in negative territory. The accumulation-distribution line is also rolling over, so I'd steer clear of Alcoa until it gets its act together. The long price-by-volume (PBV) bars between $27 and $28.50 reveal substantial trading volume at those levels, so I'd look for any pullback into that area to attract buyers. But for now, I'd avoid the stock.

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Step back and look at this daily chart of AIG.

The secondary indicators are all flashing yellow flags. Yes, the 50-day moving average is still moving higher, but the price action is suspect. I've drawn a right triangle pattern to illustrate the flat series of peaks at $72.50 and the rising support line that is running parallel to the 50-day moving average. But AIG looks like it's falling out of that triangle. I'd watch how the stock acts at the 50-day moving average. If it doesn't bounce there, it's likely to test the breakout level at around $67. AIG is a great company, but I sure think the stock is going lower from here.

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Just last Friday, American Express broke below an established support level, and it is resting right on the 50-day moving average. As with AIG, the uptrend remains intact, but the secondary indicators are looking weak. I don't think it's constructive to predict future prices. Let's face it, they are just guesses based on hope and directional bias. Instead, I try to focus on "if ... then" hypotheticals. This works for me, because it enables me to create a trading plan based on what actually does occur rather than what might occur.

In this case, if the 50-day moving average does not catch this decline, I'd look for the stock to find support at around $57. Why? Notice how long the PBV bar is at $57. This reflects the high trading volume that occurred back in October. If the stock falls that low, I'd expect to see some buying interest from those who regret selling the stock back in October. And if that buying interest is not sufficient to soak up all the supply, then I'd look for the breakout level at $53 to be tested. Either way, I'd only buy American Express now with a tight stop on the position.

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Boeing is trading within a fairly tight volatility squeeze. The secondary indicators are all reflective of a stock without a trend, but at some point, this squeeze will resolve and the subsequent move should be substantial. The challenge of trading volatility squeezes is the unknown duration of the squeeze. This stock could tread water for another few days or another few weeks. If you like Boeing, you are only giving up about $2 by waiting for the stock to break out before buying. In return, you are reducing your chances of losing money if the breakout goes to the downside. And you are also eliminating the chance that your money will be sitting there for an extended period of time.

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After the dramatic run that Citigroup has enjoyed, a little rest is a good thing. If you are long, try keeping a tight stop on this one, because a fall below Friday's low is likely to scare up additional selling. The stock moved up to $55 from $51 rather quickly, so there is not much financial commitment at those levels. As such, a break below current support could lead to a quick decline back to test the breakout. But if Citigroup does indeed fall back to test $51, I'd be a buyer.

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Caterpillar has been on the decline for a while, and it could be putting in a bottom at $59. However, selling intensity has been heavy at the 50-day moving average, and that average is rapidly approaching support at $59. So something has to give very soon. If you're long Caterpillar, you are likely in pain. If the stock falls below $59, I'd ease that pain by selling. There is nothing about this chart that makes CAT an enticing buy right now.

Tomorrow we'll check out DuPont(DD), Walt Disney(DIS), General Electric(GE), General Motors(GM), Home Depot(HD) and Honeywell(HON).

Until then, be careful out there.

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