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Trusting the Technicals

When Wall Street’s top technicians are negative on a stock, Cramer said Tuesday, stay away from it – no matter how much you like it.

Take Family Dollar , for instance. The company is rolling out a system that accepts food stamps, so Cramer thought FDO might work given the government’s increased spending on them. But when his two favorite chartists gave the stock a thumbs-down, he had to reconsider. A closer look showed a few glaring problems that may have been missed if it weren’t for a quick check of the technicals.

According to the charts, FDO is hitting much lower highs, which indicates either more supply or less demand. The former means that the big money managers are selling their positions, while the latter is a sign that only small-time investors are interested in the stock. Regardless, “the move higher is over,” Cramer said.

Another technical reason FDO doesn’t work is the stock’s move away from its major uptrend line at $25.50. With Family Dollar fetching $31.32, there’s little upside left but plenty of downside.

As for the fundamentals, Family Dollar will struggle to beat last year’s numbers, which is when former President Bush’s tax-refund program helped to boost sales. Even an increase in food-stamp issuance won’t generate a one-time bump in revenues big enough to impress Wall Street this year.

There’s also Family Dollar’s image problem, meaning that investors view this as a recession stock. The common wisdom, though, is that the economy is turning up. So the big money most likely will rotate out of FDO and into more cyclical plays.

Finally, private-equity giant KKR plans to IPO Dollar General, and that’s telling for two reasons. One is that KKR wouldn’t try to unload its discount retailer if the firm didn’t think that now was the time to get out. If KKR wants to sell, so should you. The second point is that Dollar General translates into more competition for Family Dollar, and that’s never good.

The bottom line? The pros column is much shorter than the cons when it comes to buying FDO, and Cramer knows this thanks to his trust in technical analysts. Investors should keep this in mind when researching their own investing ideas.

“I think I could have made a fool of myself,” Cramer said, “recommending Family Dollar off of increased food stamps. Thankfully the reservations of the chartists got me to probe deeper on this one and change my tune.”

Call Cramer: 1-800-743-CNBC

Questions for Cramer? madmoney@cnbc.com

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Symbol
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FDO
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