Sharon, I used to use the chalk pencils (like the ones you asked about), but now I like to use Berol brand "Aquarelle" pencils the I get from my local fine arts shop.
A Google search turns up lots of sources for the Verithin pencils that Alex recommends.
If you are new to needleturn, you might be interested in reviewing my tutorials for the very first TQS BOM where I showed how I do needleturned applique:
http://good-times.webshots.com/album/562185015aGQwDk
You might also be interested to know that some appliquers even use a permanent Micron Pigma pen to trace their outlines! You just have to make sure that the mark is turned completely under, because it will NOT wash out!
Keep trying different methods until you find one that you are comfortable with! It would be a good idea to go back through all of the past TQS episodes that feature applique artists who do needleturn techniques and see all of the different methods that they use! I would start with episodes 203, 210, 310, 404, 611, & 806.