Fitz Bits: Watch for a Google Breakout

 | Dec 13, 2011 | 10:08 AM EST  | Comments
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Stock quotes in this article:

goog

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vfc

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jblu

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ctrp

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dhi

This piece originally appeared on Real Money Pro.

Today, let's look at some stocks.

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.


 

Google has been trading in an extremely wide range over the past couple of years, with consistent resistance at around $620. But, since hitting $600 in October, the stock has been trading in a higher range that has set up the recent breakout. The current trading range for Google is right around $620 in a tight box. If it breaks out of that box on high volume, that will likely represent the start of the next leg higher after a multi-year consolidation.


 

V.F. Corp. has been consolidating between $125 and $140 over the past couple of months, but the uptrend is still well-defined. Look at the 50-day moving average -- it's still advancing steadily higher. If you're buying this little pullback to test that moving average, you might take just a small position. If the stock then breaks out above $140, you can add to that position as the stock starts to move higher.


 

I last covered JetBlue a couple of weeks ago and cautioned against buying it until it pulled back. Well, that turned out to be lousy advice, because the stock has just continued to run. Now the bulls are back up against the 200-day moving average. Is that where this advance stalls out? Well, given my recent track record, I'm the last guy to try to call the top. The declining volume is a bit concerning, but it's not enough to sell the stock. Instead, I'd suggest just using a tight trailing stop on any long positions. The eight-day exponential moving average works pretty well in this type of situation. So long as JetBlue continues to close above that key moving average, it'll be right to remain long.


 

Ctrip.com has been moving south for quite a while as it has searched for enough aggressive buyers to establish a bottom. The mid-November selloff occurred on massive volume, which often establishes a bottom, but not so in this case. Rather than move higher, Ctrip has continued to fall. Still, Monday's flat close is actually an improvement, particularly considering the rest of the market's weakness. So, if you like to try to catch a falling knife, this stock actually presents a low-risk opportunity. As long as you keep a tight stop beneath yesterday's low, you can hold your hand out.


 

Finally, D.R. Horton is a homebuilder that's worth a look. The entire sector made a big advance off the October low before consolidating during November, with the recent breakout having led to yet another consolidation. I just can't get behind the homebuilders yet, but that doesn't mean they're off-limits to you. If you're long D.R. Horton, keep a stop just beneath current consolidation. If that support breaks, the stock could fall back to $11.

Be careful out there.

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