Off the Charts: Family Dollar Vs. Big Lots

Many of Wall Street’s biggest money managers study charts to divine a stock’s future performance. That’s why it’s important to understand this technical analysis, as it’s called. After all, these guys set the market’s prices, so investors need to know what’s behind their moves.

Cramer lately has spent a lot of time explaining charts. Hence the creation of Mad Money’s new “Off the Charts” segment. He’s trying to give investors any edge he can during this recession. For this week’s edition, “trade-down plays,” or stocks that thrive during a downturn, were the focus.

Technicians say that both Family Dollar and Big Lots are buys, but the fundamentals seem to indicate that there’s only one winner here. Cramer’s always preferred that latter school of investing, but let’s take a look at the charts to better understand the technicians’ bullish call.

The first chart below is Big Lots’ weekly performance. The December low and the one the stock is in right now tell two different stories. The December “event,” as it’s called, shows BIG getting crushed down to 53% below its 200-day moving average, which is the technical term for how close a stock stays with its long-term trajectory. Notice how BIG snapped right back after that low. But the present low amounts to only 46% below the 200-day moving average, making it more of a process than an event. And that is supposed to lead to more modest and predictable gains.

MM_Chart_20090303_BigLots07.jpg

Now look at BIG’s daily charts. The 50-day moving average – how the chart has been trending – has caught up with the stock’s price decline. So now BIG is ready to leapfrog over it. The February rallies that reached past the moving average indicate more aggressive buying on the dips and less selling into the rallies. Technicians see this as bullish because it means shareholders feel good about keeping their positions and buyers are willing to pay up. Big Lots reports earnings Wednesday, and one of Cramer’s favorite chartists is expecting a big move up.

MM_Chart_20090303_BigLots08.jpg

As for Family Dollar, notice how the stock moves inversely to the S&P 500. FDO moves higher as the index falls, which proves Cramer’s thesis that discount stores are in favor during this recession.

MM_Chart_20090303_FamilyDollar06.jpg

The daily chart below shows that buyers eager to pick up more and more FDO, as each pullback is bought at a higher level than the last. The demand is persistent, Cramer said, but then again, so is the supply. That is what has created that “flat top” line at $29. Any buying demand is immediately met with seller supply, pulling the stock back before it has a chance to break through that line.

MM_Chart_20090303_FamilyDollar08.jpg

Technicians want to see FDO break through the triangle formed by the 50-day moving average and the flat-top line. The longer the stock trades within its boundaries, they say, the more likely the bottom will fall out. Remember, shareholders have been too willing to sell at the $29 level, so a break beyond that would indicate that FDO’s uptrend has some staying power.

But as Cramer always says, he wants to be in a stock before the breakout, not after. So he doesn’t see much sense in ignoring FDO at these levels but buying at a higher price. And chart or not, he doesn’t think Big Lots is a buy. The company is under too much pressure right now. With the retail environment is so dire, every store deals in closeout merchandise – because they’re all going out of business. It’s no wonder then that same-store sales have been decelerating. Cramer urged viewers to sell some of the BIG holdings if the stock pops on Wednesday.

But Family Dollar, on the other hand, is in good shape. The company has turned itself around over the past year, thanks to improved merchandise, lowered costs – and as a result, wider margins – and FDO is even accepting food stamps now. On Jan. 7, good sales, upgraded operations and same-store sales growth helped to deliver a great earnings report. So if investors are going to buy a trade-down stock, Cramer said, Family Dollar should be it.




Questions for Cramer? madmoney@cnbc.com

Questions, comments, suggestions for the Mad Money website? madcap@cnbc.com

Cramer's New Book