Technical Analysis Isn't Perfect

Hey, who says technical analysis is easy to comprehend? Certainly not alert reader A.F., who appears to have given up on the whole idea.

A.F. writes:

On June 9, technical analysis pointed to buy for Cosi (COSI - commentary - Cramer's Take) and Restoration Hardware (RSTO - commentary - Cramer's Take). I don't understand how the chart can be so badly off base. Can you?

One of your former fans.

My reply: Imagine that, A.F., a chart being wrong. Well, let's take a look back at Cosi, since it had nearly the same setup as RSTO, and see if we can figure out what happened.

---

---

So, you can see that TA is all a sham. Time to take up the fundie side. Or is it?

---

---

Ah, now we have a bit clearer picture. The market topped out on the exact day I posted both Cosi and Restoration. My experience is that nearly every breakout will fail during a market selloff, and the above stocks certainly were not immune.

So, where does that leave us? We have to keep in mind a few things.

Remember, good chart-reading provides only the slightest of edges in figuring out a stock's future move. But that slight edge and a good exit strategy when you're wrong -- and you will be wrong a lot -- are all you need to make money.

The best chart reader in the world is always trumped by the market. As I mentioned above, if the market is selling off, breakout longs won't work. Simple as that.

Chart-reading and trading are two completely different activities, and they both should be part of an overall strategy. Let's stipulate, as an example, that since June 9, most longs would not have worked. As traders, though, we can live with that if we're also working the short side. In fact, during that time period, I've featured 10 longs in my newsletter, but 19 shorts. So while longs haven't been great, they've been offset by the profitability of playing the opposite side.

Charts 'n' Things

Today, the Nasdaq Composite, Pentair (PNR - commentary - Cramer's Take), Domino's Pizza (DPZ - commentary - Cramer's Take), Optimal Group (OPMR - commentary - Cramer's Take), AstraZeneca (AZN - commentary - Cramer's Take) and Time Warner (TWX - commentary - Cramer's Take).

---

---

---

---

---

---

---

Charts produced by TC2000, which is a registered trademark of Worden Brothers Inc.

---

And that is the final word from Los Gatos, where my enthusiasm for Netflix (NFLX - commentary - Cramer's Take) has waned considerably since I started getting Comcast's "on-demand" service. In fact, if I can't watch a movie via on-demand, I don't watch at all -- a fact that should have caused me to short NetFlix shares months ago.

---

Gary B. Smith is a freelance writer who trades for his own account from his Maryland home using technical analysis. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Smith writes a daily technical analysis column for RealMoney.com and also produces a daily premium product for TheStreet.com called The Chartman's Top Stocks -- click here for a free two-week trial. While Gary cannot provide investment advice or recommendations, he invites you to send your feedback to [e-mail].