Charting Cramer: HAL

The more I learned about Cramer -- courtesy of both his once-upon-a-time radio show and his first book, Confessions Of A Street Addict -- the more I understood what it was that attracted me to him and his work. Cramer may be the best salesman the stock market has, but he is first and foremost a storyteller. Anyone who listens to or reads Cramer (who also writes a regular column for New York magazine) for very long realizes that what he does is tell stories about companies and stories about stocks.

One of Cramer's signature admonitions, to look for good companies with broken stocks, hints at this characteristic. He has a story to tell, a story about a product, a market, a business plan, a chief executive officer, a workforce, a country, a world. And however that story is told, the final chapter is recorded almost always in one of two ways: "BUY! BUY! BUY!" Or "SELL! SELL! SELL!"

BRINGING THE MOUNTAIN TO MOHAMMAD
It may seem odd for a dyed-in-the-wool chartist like myself to be so fond of a podium-pounding fundamentalist like Jim Cramer. First of all, it is worth pointing out to those who do not know that Cramer's wife, whom he affectionately referred to as "The Trading Goddess" (until she equally affectionately demanded he stop), was as committed to the charts as Cramer was committed to the balance sheets. Although no longer an active market professional, Cramer's wife, Karen, not only spent many years at Cramer's side during his tenure as a hedge fund manager in the 1980s and 1990s, but also has been credited by the King of Cramerica himself as being the one responsible for pulling his beans out of the boiling water on more than a few occasions (also well-chronicled in Confessions Of A Street Addict).

So even if it is only by marriage, Cramer's got some "chart" in the family.

Second, I think charts tell stories also. They may appear to be abstract, Wassily Kandinsky- or Joan Miro-like expressions compared to the realism depicted on Cramer's canvasses nightly on CNBC's Mad Money. But the stories that charts tell -- once a trader or investor becomes adept at reading them -- are every bit as meaningful and evocative as those that come from conference calls with corporate CEOs. Given that I've been a chartist for as long as I've known what charts were for, I'd even argue that this is one instance in which the abstract is clearer than the "real."

So why not combine the two? This new series for Working Money's "Focus On" theme is called "Charting Cramer." Each week -- or at least as often as it seems worthwhile -- I'll bring a trio of stocks that Cramer has highlighted on his CNBC program, Mad Money. I'll iterate the theme that has Jim Cramer cuckoo (or cross-eyed) about the selected stocks but will then spend most of the time putting these stocks through the technical test. In other words, Cramer will provide the stories. Working Money will provide the pictures.

Hopefully, this marriage of fundamental and technical storytelling will help investors and traders alike better appreciate all that goes into making winning stocks, profitable trades, and great investments. Because Cramer says that his preferred holding period for stocks is 12 to 18 months, I will mostly look at weekly charts of the stocks under review, while also occasionally noting instances when opportunistic trades around these positions might be worthwhile for those wanting to work in shorter time frames as well.

VALUE FOR SALE: KING HAL
Recently, Cramer announced three stocks as his "value stocks for 2007": Halliburton (HAL), Goldman Sachs (GS), and Altria (MO). Anyone who has listened to Cramer over the past several months or longer knows that all three of these stocks have been Cramer favorites for some time. As part of a series in which Cramer will highlight not only his value picks for 2007, but also his growth and speculative picks as well, Cramer's value stocks are not necessarily value stocks in the same way that you might find various, good-but-down-on-their-luck stocks in a typical value stock-oriented mutual fund manager's portfolio.

Rather, Cramer's working definition of value is much simplier: These three all represent excellent, blue-chip quality stocks that simply are, by his metrics, too cheap to remain on the sales rack. Whether the secret is unlocking inner value, as is the case with Altria and Halliburton, or simply being an underappreciated overachiever like Goldman Sachs, what these three stocks have in common according to Cramer is the fact that while they are meandering in various states of investor disinterest right now, they will all seem like obvious places to have invested some 365-odd days from now.

First up is the stock Cramer refers to as "King Hal": Halliburton. This is a stock that Cramer has long been a fan of and owned through his charitable trust. When talking about Halliburton of late, Cramer has focused on what he calls the "cheapness" of the stock and the possibility that the stock could be "taken private" if the market doesn't wake up and realize what a bargain Haliburton shares represent. What do the charts say?

FIGURE 1: HALLIBURTON, WEEKLY. A great bull market in Halliburton saw shares rise from 13 to 41 from the summer of 2004 to the spring of 2006. The correction that began shortly afterward retraced fully 50% of that rally before bouncing more than 20% in the autumn of 2006.

The correction that began in the spring of 2006 started off similar to the corrections in the autumn of 2005 and the first few months of 2006, corrections that shaved 15-17% off the top. Neither of those corrections took out a previous low, making both corrections excellent buying opportunities for longer-term traders.

The correction in the spring of 2006 has so far proved to be different, as it took out the January-February 2006 correction low in August 2006 and severely tested the September-October 2005 correction low in October 2006. Interestingly, as Figure 1 shows, the September-October 2005 correction low is at approximately the same level as a 50% retracement of Halliburton's advance from the summer 2004 lows. This helps put the bounce that took place in October 2006 into clearer context, as well as setting a new key level of support if the correction is to run its course without any further technical damage to the stock. That bounce has seen shares of Halliburton move from about 28 to just shy of 34 in late November 2006.

As far as I'm concerned, one of the best technical indicators when looking at weekly charts is the moving average convergence/divergence histogram (MACDH). I've written enough about this indicator in other contexts, but when looking at the longer-term movements of markets I find myself agreeing with market technicians like Alexander Elder and John Murphy who suggest that the MACD histogram is among the best when it comes to technical indicators for intermediate- and long-term market moves. And adding a MACD histogram to the weekly chart of Halliburton -- and focusing on the most recent nine months of trading -- shows a stock that may have put in a short-term top in the wake of its November 2006 bounce.

My suspicion that this may have occurred is based on the way the MACD histogram peaked out on the weekly chart as of the week ended December 8. That week is highlighted by an oval in the weekly chart shown in Figure 2 and the horizontal line that extends from the high of that week represents a significant zone of resistance. Note also that this zone of resistance is only a few points higher than a pair of intermediate- and longer-term moving averages: the 20-week (or 100-day) EMA in red and the 50-week (or 250-day) EMA in blue.

While it may have appeared for a few weeks as if these moving averages might have provided support for a continued move higher, the fact that Halliburton broke down below these levels in mid-December 2006 is a bearish sign for the stock going forward.

FIGURE 2: HALLIBURTON, WEEKLY. After attempting to break out above the 20- and 50-week EMAs, Halliburton failed and closed back below these moving averages in mid-December. A test of the October lows just north of 26 seems a likely next step for the stock.

A BEAR MARKET BARGAIN?
However, as Figure 1 makes clear, a failure to find support at the 26 area could be a significant event -- and a painful one for those long the stock. The 26-27 level coincides with a key retracement level (61.8%) as well as with support found twice before during corrections: the correction of September-October 2005 and the correction of April-October 2006. And beyond 26 to the downside there really isn't much in place to stop the stock if it continues to slide. In fact, the next obvious source of potential support does not materialize until the 19-22 level, at which time Halliburton would have retraced as much as 75% of its previous advance -- or more.

As of this writing, Halliburton is off some 30% from its 2006 high. Among other things, this means there has been enough of a selloff, enough pain, for most of those "weak hands" who felt they needed to sell the stock to sell it. After a correction of 30%, bargain hunters -- some of whom were likely involved in Halliburton's October-November bounce -- often appear to accumulate stocks at prices not seen in many months (or, as in this case, almost a year). But if those buy prices in the high 20s are taken out by price action to the downside, then the weak hands among those bargain hunters are likely to show themselves, necessitating even lower prices in order for buyers to reappear.

What can investors look for as a sign that those "lower prices" may have arrived? The bounce in October-November occurred with a slight but true positive divergence in the MACD histogram. I suspect that when the drop in Halliburton does come to an end, the positive divergence in the MACD histogram will be at least as clear if not more so. And it is just that sort of positive divergence that investors and longer-term position traders should watch for in the event that the October 2006 lows are breached to the downside.

Even in the absence of a positive divergence, investors and traders looking to buy Halliburton should watch for a "P-p-P" pattern in the histogram, and to mark the low of that middle "p." If Halliburton is to rise from such a low point, then that marked low should represent a key bottom and source of support for patient buyers. "King Hal" may be a great value now, but given the trends in the MACD histogram, there is a good chance it will become an even better value down the line.

In part II, I will chart and analyze the intermediate- and longer-term prospects for Goldman Sachs and Altria, the rest of the cohort Jim Cramer has called his "top three value stocks for 2007."