Fitz Bits: Don't Chase the Runners

 | Feb 07, 2012 | 12:00 PM EST  | Comments
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Stock quotes in this article:

drys

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orig

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sks

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cof

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bac

,

hmin

This commentary originally appeared at 10 a.m. EST on Real Money Pro -- the ultimate traders' resource for actionable trade ideas and in-depth market analysis. Click here to learn more.

Let's look at a few reader requests.

  • DryShips (DRYS)
  • Saks (SKS)
  • Capital One (COF)
  • Bank of America (BAC)
  • Home Inns & Hotel Management (HMIN)

Each day, I'm featuring several reader requests for the current technical take on a stock. I can't assure you that I'll get to yours, but I will certainly make every attempt to do so, as long as the stock meets the following criteria.

1. The average daily trading volume needs to exceed 250,000 shares. If a stock trades too thinly, chart analysis doesn't help much, because there just are not that many traders involved. One big buy or sell order can move the stock in ways that chart analysis just cannot predict. So let's stay above 250,000 daily shares.

2. The stock really needs to be trading above $5. Sub-$5 stocks don't get the same treatment by institutions and portfolio managers. Also, many traders set their trading screens to ignore stocks below $5 just to cut down on their trading candidates. While I'm sure your favorite penny stock is the next undiscovered gem, I'm not in the business of breaking news stories ... so once your gem is discovered, let me know, and I'll take a look at the chart.

3. Make sure you check my recent "3 Stocks I Saw on TV" videos. I don't want to be too redundant, so if I've recently covered a stock in video format, I won't repeat it here.

Hopefully, you've noticed that I alternate between daily and weekly bars in the charts. It's important to understand the underlying rationale for choosing one time frame over another. I differentiate between these time frames in pretty simple terms.

The longer time frame -- the weekly bar chart -- is my "decision" time frame. I want to remain in phase with the trend, and I use the weekly bar chart to identify the trend. So I'll feature a weekly chart when I want to emphasize a certain aspect of the prevailing trend -- not a specific buy or sell point. This weekly chart is the time frame in which I make my decision: Do I want to buy or sell the stock?

The daily chart is my "action" time frame. Once a decision is made on the basis of the weekly time frame, then we zoom in on the daily chart to choose that level at which action is taken. The daily time frame is my preferred frame of reference for actually implementing the decisions I've made on the weekly chart.

In your own analysis, make sure you are using different time frames for different things; otherwise your actions will largely be a function of your emotions.


DRYS Daily

Yesterday the shipping stocks took off with a vengeance. DryShips (DRYS) was the biggest gainer, having ramped 30% in two days on positive news out of Ocean Rig (ORIG), a prior spinoff in which DRYS still owns a big stake. But after this kind of move, should you be buying? I wouldn't. In fact, I'd be taking profits merely as a matter of discipline. You can always buy it back if you change your mind ... but it's hard to avoid booking profits when a stock moves this fast.


SKS Daily

This daily chart of Saks (SKS) shows a recent breakout above the 200-day moving average. But we saw this type of move back in October, with the stock breaking above the 200-day moving average for only two days before reversing. This time may be different because the stock has been consolidating for the past several weeks. But I don't think you should chase it; instead, just wait for a pullback to test the 200-day moving average.


COF Daily

Capital One (COF) is another stock that's recently broken above the 200-day moving average. As with SKS, this is a stock that shouldn't be chased. Instead, take note of how COF is acting on pullbacks to the 50-day moving average. Each one finds support at higher levels. This is a pattern I like -- the closer the price moves to the 50-day moving average, the lower the risk.


BAC Daily

Bank of America (BAC) has completed a multi-month reversal by breaking out above the October high. Volume has been solid, so this looks like an advance that will work. If you're long, stay that way. If you're looking for an entry, watch how the stock behaves around the 200-day moving average. This is typically where traders will take profits, so we could see a bit of a pullback.

With support between $7 and $7.50, any pullback should be bought. With the 50-day moving average now moving higher, BAC is in a new uptrend.


HMIN Daily

This daily chart of Home Inns & Hotel Management (HMIN) shows a tight consolidation just above the 50-day moving average. Any breakout above $30 on high volume is a buy signal. But any pullback below the 50-day moving average is a sell signal. Until one of those two events occur, there's nothing to do.

Be careful out there.

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