Cramer: Spotting a bottom after a long decline
Over the years, Jim Cramer has found that charts can help investors to break away from the pack and spot a move before it happens.
So, while homework on the fundamentals of a company is still important, it's a bad idea to pull the trigger on a stock without looking at its chart first.
"I would consider looking at the chart of the stock you like as part of the homework, making it ingrained into your thinking," the "Mad Money" host said. (Tweet this)
Part of looking at the charts is being able to spot the bottom for the best entry points and ceilings for the best places to exit from a stock. When an investor buys a stock, they are betting from the start that the stock will go up. That means understanding the historical patterns of the charts and where it might be headed.
Sometimes, finding a bottom after a long decline can be incredibly lucrative. In 2009, when the market was in a severe decline, Cramer had the sense that the decline's velocity was lessening. He then began looking for the most bulletproof stock he could find.
He came up with AT&T (NYSE: T), which had a lot going for it with the fantastic rollout of the Apple (NASDAQ: AAPL) iPhone that was going to produce record profits for the company.
Cramer first checked with four chartists, who all agreed that AT&T had a strong foundation. They also agreed that it had established a nadir in 2008 at $21 with the tsunami of selling. They figured this out by looking at the volume and saw that it had expanded to a level far in excess of a normal period's trading. That is a sign that the sellers were exhausted.
"As long as sellers overwhelm buyers with their dumping, no base can form. A climax is a sign that those potential sellers who had been holding on for some time are finally giving up en masse," Cramer said.
Additionally when a chartist sees that the volume has grown or expands but the stock doesn't go down, that means the stock has finally found its floor and is now safe to buy. That is when the number of buyers is finally equal to the sellers in their power to determine the direction of a stock.
Chartists also look at the advance of a stock, which happens when the stock takes out its resistance overhead. Technicians don't just look at the closing price and a graph against the previous day, because it won't actually paint a clear picture of the trajectory.
Instead, technicians use what is known as a moving average to better represent a stock's movement. They figure out the moving average by taking the closing price of a stock over a period of time, add them up, and then divide by the number of days in that measured period.
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So, when AT&T cracked through the ceiling of resistance visible in the 200-day moving average, that was the signal for Cramer that it was finally a good trade or investment—the old roof became a new floor.
"When you see this kind of reliable pattern as AT&T demonstrated, despite what the fundamental analysts might be saying, you have to use the discipline that these technicians give you to pull the trigger and take advantage of a fabulous buying opportunity," Cramer said.
Otherwise, that opportunity could have been overlooked while the market takes a beating, simply because the chart was not taken into consideration.
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