Buckle up! Fear is back, signaling major turmoil

Jim Cramer has been in the stock market long enough to recognize a red flag when he sees one. This year the market has been filled with a landscape of uncertainty and volatility, and he's seeing red flags all over the place.

Hence, the "Mad Money" host thought it was a good time to take a closer look at the CBOE Volatility Index, also known as the VIX. It's the gauge for measuring the level of fear in the stock market.

To gain insight, Cramer turned to Mark Sebastian, a technician and founder of OptionPit.com. The technician pointed out that last week the VIX broke out above 20, indicating that investors are expecting a higher than average amount of volatility.





Scared fear
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However, when he looked at the daily chart of the VIX going all the way back to 2011, he saw that from the start of 2012 to August of 2014, the VIX only settled above 20 four times.

Yet, things have changed dramatically since that time. Since September of last year, the VIX has settled above 20, all of 14 times. That's more times than in the past two years.

What does this mean? Uncertainty.

"The action in the VIX is reflecting the fact that the market is no longer as safe and reliable as it used to be. It's become much more of a roller coaster," Cramer said.

There is more, as well. Sebastian also saw a very perplexing pattern, that could signal an overall red flag for the market.

In a healthy market, there should be an inverse correlation between the S&P and the VIX. Meaning as the S&P gets higher, investors have a sense of relief and the VIX goes down. Thus, fear subsides when the market goes up and grows when the averages plunge.

Out of all of the red flags lingering in the charts, what worried Sebastian the most about the VIX is the lack of an inverse relationship. The charts show that volatility is actually getting higher as the S&P churns in place or reaches new highs.

According to Sebastian, when the VIX and averages rally together this is a sign that something big is about to happen, and it will be bad.

Sebastian thinks the patterns that he is seeing are reminiscent to the debt-ceiling crisis in 2011 where the S&P 500 was slammed and lost 16.5 percent of its value in one month. He is concerned that we are about to replay this scenario.

What could cause the market to tank? The technician's best guess is that it will fear connected to Europe. Specifically, the Greek elections next weekend and worries that the European Central Bank's quantitative easing programs aren't going to be able to do enough for the economy overseas.

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So buckle up, Cramerica. The charts, according to Sebastian, indicate that a nasty selloff is in the near future. However, have no fear—in Cramer's opinion a European based pullback generally creates a good buying opportunity for investors.

"If Sebastian is right and we do get a broad based pullback, then I need you to stay calm and use the weakness to do some buying, because the U.S. economy is in good shape here," Cramer added.

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