Cramer: Charts showing a huge S&P correction could be coming

Cramer: Charts show huge sell-off could be coming
Cramer: Charts show huge sell-off could be coming   

After the vicious sell-off last week, Jim Cramer wanted to know how much more pain the S&P 500 has to endure before it finally bottoms. And what he discovered could be significant.

To answer this important question, he enlisted the help of Carolyn Boroden, a technician who runs FibonacciQueen.com and a colleague of Cramer's at RealMoney.com.

The reason Cramer turned to Boroden is she previously nailed calling the peak of the S&P. When Cramer last checked in with her in June, she said it was time to get cautious about the S&P. In June, she thought the rally for the S&P would peak around 2,138. Sure enough, it peaked at 2,134.

Boroden utilizes a mathematical methodology based on the medieval mathematician Leonardo Fibonacci. He discovered that a key series of ratios tend to repeat themselves over and over again in nature.

These ratios can also appear at key levels in the stock market. Boroden looks at past swings of a stock or index and then utilizes the Fibonacci ratios to find potentially important levels that could change a trajectory.

Given the recent volatility, Boroden believes that this market is vulnerable to the downside. Looking at the S&P 500's weekly chart, she did not like what she saw.





The one spark of hope that Boroden found were two key levels. First was a floor of support between 1,847 and 1,857, which is down 2 percent from current levels. She found a second floor running to 1,832 from 1,838, down about 3 percent.

Boroden noticed the Fibonacci timing cycles suggest that this could trigger a healthy bounce, and it could happen sometime this week.

However, if the S&P 500 breaks down below the floor of support in the 1,830s, then Boroden believes a brutal sell-off could happen. It could even be similar to the magnitude of what happened in the financial crisis.

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Projecting the levels from the peak in May 2015, Boroden thinks that the S&P could get hammered down to 1,350, or even as far as 1,225.

"In other words, if we don't hold above the current floor of support, Boroden is not ruling out a massive correction that could take us 28 percent or even 35 percent lower," Cramer said.

Boroden did not say that this will definitely happen, but she does think the potential risk could be enormous. That is why she recommended that if there is a near-term bounce, investors should use the strength to ring the register and raise cash to be prepared for a longer and deeper decline.

"I personally don't believe that this kind of a decline is in the cards, but you need to be aware that right now the charts are saying some very ugly things, and I think it accentuated the caution I've been trying to demonstrate," Cramer said.

Cramer doesn't want to be the bearer of bad news, but he thinks it is important for investors to be aware that the technician that nailed the market peak has found that the S&P's floor of support is in the 1,830s, and it could be a significant level to keep on the radar.

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