Charting Cramer's Dow Forecast, Pt. 3

This column was originally published on RealMoney on Jan. 10 at 12:01 p.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 3 of Dan Fitzpatrick's technical review of the prospects for the stocks that make up the Dow 30. Be sure to read Part 1, Part 2, Part 4 and Part 5.

Starting just after Christmas, Jim Cramer began a series of pieces on the 30 stocks that make up the Dow Jones Industrial Average. He gave his take on each of the companies with respect to their prospects for 2007. The key difference between fundamental analysis and technical analysis is simple: Technical analysis focuses on the price and volume data of the stock, while fundamental analysis covers all the aspects of the company.

Because we trade the "stock market" and not the "company market," prices matter. In very short-term trades, I couldn't give a darn about company fundamentals -- short-term trades are governed by market dynamics. Are sellers leaning on the stock, or are aggressive buyers bidding the price higher? Has most of the buying already been done such that the stock is about to roll over? Has the stock been selling for five straight days and is it now ripe for a relief rally? These are just some of the countless dynamics that govern price movement throughout the week.

But longer term, the fundamentals of the company do matter -- they matter a lot. And it's important to look beyond the company itself and consider its business as well as economic and monetary factors. These factors affect the growth prospects of the company -- and over time, the market pays up for growth.

I think the best approach is to combine technicals and fundamentals. Decide whether you like the company based on how you think the business will be over the next year. If you like it, study the stock to find the most favorable level at which to purchase it. Why buy at $49 when the stock is trending lower? You might be able to buy it at $44 next week. That's a 10% giveaway. Worse still, the stock will have to climb 11% higher just to get from $44 back to $49 -- and all of this takes time. So it's certainly possible to be right about a company but have such a lousy entry that much of the profit potential in the stock simply vanishes. So chart analysis is an excellent tool for deciding where and when to buy after you have made the decision to do so.

Let's look at the price action of Hewlett-Packard (HPQ Quote), IBM (IBM Quote), Intel (INTC Quote), Johnson & Johnson (JNJ Quote), JPMorgan (JPM Quote) and Coca-Cola (KO Quote).

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Hewlett-Packard remains in a strong uptrend and is running along the upper Bollinger Band. I'd be a buyer on any pullback to the 50-day moving average. Assuming the stock does pull back to that level, the risk is relatively low because of the proximity of the stop.

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IBM sure looks a lot like HPQ, doesn't it? The stock is running along the upper Bollinger Band on above-average volume. All the secondary indicators are bullish and pointing to higher price levels. The one thing that concerns me is that the stock closed at $100. This obvious level could hold a lot of supply, as traders who bought from lower levels decide to take some off the table and lighten their positions a bit. But the possibility of profit-taking shouldn't be enough to prompt a sale of this winner. Instead, I'd suggest keeping a trailing stop in place to protect profits.

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Intel is churning right at the 50-day MA, but I'm seeing some disturbing developments. The most recent low was below the November low, and if this stock now pulls back to test the $20 level, that would form a lower high. Buying after a lower low and lower high is not the best strategy, so I'd wait for the stock to re-establish the uptrend before buying.

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Johnson & Johnson is forming a very subtle bullish right triangle -- but the price differential within the series of higher lows is so small that I don't put much faith in the pattern.

There are a couple of prominent characteristics that make me a bit cautious on JNJ. First, the negative money flow is really a confirmation of the transition from above to below the 50-day moving average. Combined with a deteriorating accumulation-distribution line, I think that JNJ is doing more than just "bouncing along the moving average" -- I think it is under more serious distribution that could take the stock down below $65.

But with that said, $65 remains a key support level, and if you sell the stock now, you are selling it for reasons other than what that chart is telling you. As long as the stock stays above the November low, it is simply consolidating in the aftermath of a multimonth advance.

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The late-November pullback below the 50-day moving average was quickly remedied by a rash of buying that took the stock back into its established uptrend. The last two weeks have seen a slight pullback that's actually pretty healthy for this stock. I've drawn the horizontal line over the resistance level back in October through early December. After breaking above that level, JPM is now pulling back to test it as support. But in light of the late-November pullback to around $45, I think any long positions could be protected by a loose stop just below $45.

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Notice how each horizontal resistance line on the Coca-Cola chart occurs on top of a period of low volatility. Breakouts from these volatility squeezes tend to be dramatic and produce quick gains for those who are quick to buy. I'd keep track of KO and take some stock only if it closes above $49.

Be careful out there.