This column was originally published on RealMoney on March 23 at 1:02 p.m. EST. It's being republished as a bonus for TheStreet.com readers.

On Wednesday, I wrote , "I gave up trying to buy cheap stocks a long time ago because I noticed that the most obscenely priced ones just kept getting more and more out of whack." A reader was a bit confused by this, thinking that I was shying away from low-priced stocks. That's not the case at all.

I'm less interested in the dollar price of a stock than the float. A stock with a small number of shares in active circulation is a stock that has explosive potential. On news that makes the stock a "must own," the bulls will step on top of each other to buy. If you're already on board, it's a great ride.

A stock like Broadwing ( BWNG) is much more likely to make dynamic moves than Broadcom ( BRCM). Why? Because their respective floats are 66.59 million shares and 439.34 million shares.

With so many shares in circulation, Broadcom bulls will have a much easier time taking in lots of shares than Broadwing bulls. It's a simple function of supply and demand: It's easier to buy on the cheap when there is ample supply. It's much tougher to get a good deal when demand is heavy but supply is low.


The Amex Securities Broker/Dealer Index (XBD) has been in a pronounced uptrend for almost two years. I've circled the major price levels. Since late 2004, this uptrend has paused for a rest every 25 points. The index is resting right at 225 now. It pays to stay with the trend, and this trend is up. Let's look at some of the broker-dealer stocks.

Goldman Sachs ( GS) continues to bounce between the middle and upper Bollinger Bands. With an uptrend this mature, I would avoid buying anywhere except on a pullback near the support line. Almost every tag of the upper Bollinger Band on the weekly chart below was followed by a pullback to the same entry price. It pays to be patient.





Lehman Brothers ( LEH) is in a very solid uptrend. The support line is a bit more ragged than the resistance line. The choppy, shallow pullbacks are the result of eager bulls with too little patience to wait for a cheaper price. Each little pause in the uptrend is bought, driving the price higher. I'd continue to watch this resistance line.

When Lehman fails to tag that line on an advance, the uptrend is close to reversing.

Bear Stearns ( BSC) has been consolidating for the past six weeks, ranging between $130 and $138. The trend is higher, so this churning is healthy -- it brings the average basis of the crowd much closer to the current price level. A higher basis minimizes the crowd's urge to take profits on any little advance, because the crowd is waiting for more.

I'd buy on any pullback to $130, with a stop just beneath that level. I've drawn an alternative breakout entry. If the stock breaks above current resistance, it's time to run with the bulls for a while.

Morgan Stanley ( MS) looks quite a bit different than the other broker-dealers. It's back where it has been several times before. The stock is consolidating within a 5% range, which increases the chances of a viable breakout. Its current trading range is the highest since early 2004. With the announcement of great earnings Wednesday, investors have good reasons to want to own this stock. I'd be a buyer on any pullback to around $59, with a stop just beneath the March low.

Be careful out there.

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At the time of publication, Fitzpatrick was long Broadwing, though positions may change at any time.

Dan Fitzpatrick is a freelance writer and trading consultant who trades for his own account. His columns focus on quantitative strategies for trading and investing. Fitzpatrick has lectured throughout the U.S. on the proper use of technical analysis and options trading. At time of publication, Fitzpatrick held no position in any stocks mentioned, though positions may change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While Fitzpatrick cannot provide investment advice or recommendations, he appreciates your feedback; click here to send him an email.