Charting Cramer's Dow Forecast, Pt. 4

This column was originally published on RealMoney on Jan. 11 at 11 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 4 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 3 and Part 5.

Over the past few days, I've been working my through the components of the Dow Jones Industrial Average, reviewing the price charts of six each day. A couple of weeks ago, Jim Cramer ran a series of articles giving his outlook on the Dow components based on his knowledge of the companies. Since I began this series on Monday, I've heard from a lot of folks who like the combination.

While at first blush it might be tempting to just blend the two approaches together -- consider Jim's outlook on a company and then put it with my chart analysis and you've done your homework. It doesn't work that way -- not this time. I wanted to let the price action stand on its own, without being clouded by Jim's views. So I have not read Jim's work. I'll do that once I've covered all 30 stocks.

This is the approach I use when I talk to money managers who ask for my take on a stock. They understand that I am not interested in their opinion on the company, or certainly whether they are long or short. They should not care what I think about a company -- that's their job. They just want an opinion on the underlying dynamics that affect the price action. That opinion should be treated as another piece of information that takes you nearer to the two things a trader needs to do: make a decision to act, and then time that act so that you can make the best trade you can.

Ultimately, the trader needs to focus on the company and the stock. But don't confuse the two. If the chart looks enticing to you, don't extend that opinion to the company. The company might stink. And if a chart looks horrible, don't ignore the company. A solid approach considers fundamentals separately from technicals. They are completely different animals.

If Jim has a bullish outlook on a particular Dow component, don't get confused if my chart analysis is bearish ... or vice versa. We're looking at different things, so the outcome is supposed to be different.

Let's take a look at our next group of six.

This chart of McDonald's (MCD) is one of those launching ramps I was talking about yesterday. MCD has been in a gradual uptrend for months, churning sideways every so often before starting another run. Stop placement is a bit tough because of all the trading at $41 -- that much financial commitment is sure to attract buyers if the stock falls back that low.

So where do we put our stop? I've indicated $42 (simply a function of the need to somehow define that risk), but if the stock falls to $42 and takes out the stop, who's to say that the long PBV bar at $41 won't mark the next level of committed buyers? So, with respect to risk management on MCD, there is no clear-cut method.

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After consistently moving higher in a series of higher highs and higher lows, 3M (MMM) has rolled over and is back below the 50-day moving average. I've marked resistance at $80. I believe that if the stock can clear $80, it's back above that benchmark moving average and shouldn't have too tough a time clearing the November high. But if it continues to fall, I wouldn't want to hang around.

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Once again we see a stock, Altria (MO), that is in a nice uptrend. While the accumulation-distribution line is a bit choppy, it's not bearish and does not really reveal any distribution within this uptrend. The other indicators are all pretty bullish. Smoke 'em if you've got 'em -- I'd stay long MO until it starts pushing $100.

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Let's take a look at Merck (MRK). A symmetrical triangle is formed by a series of lower highs and higher lows -- the rising support and falling resistance lines begin to converge. At one point, the volatility in the stock is low enough that a sudden breakout becomes likely. The typical theory is that symmetrical triangles are continuation patterns. They don't stand on their own -- they need a pre-existing trend to provide a reference point for the pattern. With the trend in MRK solidly higher, I'm expecting an upside breakout from this pattern. But just in case the bears aren't listening to me, I'd use a protective stop at around $42.

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Microsoft (MSFT) has been marking time at $30 for the past month or so. I'd be on the lookout for an upside breakout from resistance. If that breakout materializes, I'd be a buyer. I'd keep a stop back below the December low.

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Well, this daily chart of Pfizer (PFE) shows that not all major drug manufacturers are alike. While MRK is in what appears to be a healthy consolidation pattern, PFE just keeps going from bad to worse. I've drawn an approximation of support and resistance, excluding the extreme prices for the sake of drawing a clear pattern to illustrate the underlying dynamic.

Each selloff occurs on increasingly aggressive selling, and buyers are increasingly patient. They just keep pulling their bids. At the same time, each rally is weaker than the last. This type of action results in a "megaphone" pattern. At some point, that balance will shift back in favor of the buyers, but that hasn't happened yet. With the prevailing trend being down, selling strength is the high-probability trade. So, I'd be a seller on any further weakness.

Be careful out there.

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