When Technical Analysis Doesn't Work, Take Notice

Frankly, I'm surprised. I thought the market was ripe for more of a pullback, and some of the breadth indicators were certainly bearish. But as Larry Kudlow once said, "Ah, technical analysis ... that stuff works until it doesn't." Of course, Larry doesn't fancy himself a chartist, but he actually (and probably unwittingly) touched on a very good point. That is, technical analysis works, but there are times when it doesn't. I recognize the limitations of technical analysis and accept them. Heck, I embrace them, because if I don't, I'm nothing more than a gambler.

My research indicated that the market had more to fall in November. Who knows? It still might. But if the past few days were the best that the bears could do, then some would say, "See, technical analysis doesn't work, because the pullback that you expected didn't really materialize." But I see things differently. I've learned that if the market does not do what your research says it should do, then it is telling you something very important, and you had better listen.

If the S&P 500 breaks out instead of pulling back, then I believe it's time to get very aggressive on the long side. The market was supposed to pull back. The bears were supposed to have their little party, but they couldn't get it done.

We are not there yet. But if the bulls push up any more, I think the train will leave the station, and I wouldn't want to be hanging around with the bears. Now, on to the charts.

Legg Mason

Legg Mason (LM - commentary - Cramer's Take) has been in a strong uptrend, but it seems to be consolidating now. The stock is bumping right up against $85 and looks ready to break out. Money flow is bullish, and the relative strength index, or RSI, remains near the 70 range, another bullish indication. To me, Legg Mason looks buyable, with a stop at around $82.

---

Dan Fitzpatrick is a freelance writer who trades for his own account. His columns focus on quantitative strategies for trading and investing. Fitzpatrick is a member of the Market Technicians Association and authors The Stock Market Mentor, a newsletter focusing on the proper use of technical analysis for trading and investing. At time of publication, Fitzpatrick held no position in any stocks mentioned, though positions may change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While Fitzpatrick cannot provide investment advice or recommendations, he welcomes your feedback.