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Cramer Remix: Trust this market move? How to tell

Every week Jim Cramer works with technicians in "Mad Money's" Off The Charts segment, in order to look at patterns in charts that can predict the next big moves for stocks.

While Cramer is certainly not a chartist, he understands that charts do play a vital role in understanding if a big move is the real deal.

"Why do charts work? First you must consider them as if they are footprints at a scene of a crime. These footprints trace out what big money managers might be doing with their buying and selling of stocks," Cramer said.

The second reason to care about charts is that Cramer finds there is a remarkable self-fulfilling nature of charting stocks. This means some of the best investment ideas can come from chart inspired brainstorming sessions. However, Cramer thinks that the best way to produce results is with a careful melding of both fundamentals and technicals.

A good technical analysis means being able to find the indicators that will help to determine the overall direction of the market, especially since so many stocks are influenced by the S&P stock futures.

Sometimes technicians start by comparing the chart of an individual company to the chart of an average to determine the legitimacy of a move. This is what is known as confirmation.

For instance if the Dow Jones Industrial Average hit a new high, historically it is not sustainable unless the Dow Jones Transportation Average also hits a high, or confirms the breakout status of the Dow itself. So if both the industrials and the transports hit a new high, Cramer considers the move to be one he can bless as being legitimate.

Read MoreCramer: How to detect phoney-baloney market moves

A trader works on the floor of the New York Stock Exchange during the morning of August 27, 2015 in New York City.
Getty Images
A trader works on the floor of the New York Stock Exchange during the morning of August 27, 2015 in New York City.
"overbought stocks, ones with many buyers reaching to take in supply, tend to snap back after they have gotten too far away from their longer term trend line" -Jim Cramer

"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.

"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 amount of buyers is finally equal to the sellers in their power to determine the direction of a stock.

Read More Cramer on stocks: When to get in and get out

Cramer also uses technical analysis to determine if a stock is overbought and ripe for a pullback—or oversold and ready for a bounce.

Investors can determine if a stock is overbought or oversold by charting the ratio of higher closes, also known as the relative strength index, or RSI. This is a momentum oscillator that measures the direction that a stock is going, and the velocity of the move.

Cramer also likes to match the RSI of an individual stock to something else, maybe the relative strength of its sector or a larger index, and then measure the price action historically. He looks for anomalies where strength stands out, because that is a sign that there is a pending move, or a change in momentum.

"Typically when a stock gets overbought it is ripe for a pullback because overbought stocks, ones with many buyers reaching to take in supply, tend to snap back after they have gotten too far away from their longer term trend line," the "Mad Money" host said.

Read MoreCramer: Cash in on stocks due for a bounce

Boo! Beware the head-and-shoulders pattern

"Yes, just like a human's head. That is the most frightening pattern in the chart book" -Jim Cramer

The most simple and reliable pattern out there is the dreaded head-and-shoulders pattern. Cramer learned not to ignore this pattern when his charitable trust bought Alcoa in the low teens in 2010, and ultimately took a blood bath because it was a really early buy.

The most simple and reliable pattern out there is the dreaded head-and-shoulders pattern. Cramer learned not to ignore this pattern when his charitable trust bought Alcoa in the low teens in 2010, and ultimately took a blood bath because it was a really early buy.

Alcoa's stock had a healthy run from winter of 2010 until February of 2011, rising to $17 from $13. The stock ran to $18 on the eve of its quarterly earnings report, and Cramer thought it was a fine quarter when it reported.

Yet what worried him was that even after an initial positive reaction, the stock dropped. So a few days later, Cramer assumed it would take out its $18 level and went back to buy more. Cramer was wrong—extremely wrong.

What Cramer didn't realize is that the fluctuation in price had traced a perfect head-and-shoulders pattern. And no, this isn't referring to the brand of a shampoo.

"Yes, just like a human's head. That is the most frightening pattern in the chart book," the "Mad Money" host said.

Likewise, if a head-and-shoulders pattern signals trouble ahead, then an inverse head-and-shoulders pattern signals the opposite—a chance for glory.

Read More Cramer: Yikes! Scariest pattern in the chart book

So in situations when a stock's fundamentals give little insight into the direction it is headed, the technicals could light the way. Another chart type that Cramer relies on is called the cup and handle pattern. In fact, he has used the reliance of this pattern to stay in stocks that he might have otherwise sold.

A cup and handle pattern is one that resembles a cup with a handle. The cup creates a 'U' shape with a downward drifting handle.

Cramer learned the lesson of the beautiful cup and handle opportunity in the stock of Domino's. He was thinking about selling the stock, when chartist Ed Ponsi set him straight and told him not to.

Ponsi pointed out that Domino's had reached a pivotal moment and was getting ready to launch into a bigger move. Sure enough, Ponsi nailed it—and Domino's proceeded to double and then some. It turned out that while Cramer was nervous about the stock, it was actually consolidating and getting ready to power higher.

"Technicians and fundamentalists can co-exist. Make peace with them both, and I bet you will make a heck of a lot more money than if you are blind to one or the other and certainly to both," Cramer said.