Cramer: Stock Market 'Do Not Enter' Sign?

(Click for video linked to a searchable transcript of this Mad Money segment)

Jim Cramer likes to make investment decisions based on fundamentals. That is, things like earnings, economic data and news-related developments.

Unfortunately there are strong fundamental catalysts in the market right now that favor both sides, that is, both the bulls and the bears.

And when that happens, pros like Cramer often turn to technical analysis for insights to determine which camp may have the upper hand. For the following analysis Cramer sought insights from Mark Sebastian, chief operating officer at OptionPit.com.

To get a handle on what may lie ahead for stocks broadly, Sebastian watches patterns in the Vix – the CBOE Volatility Index, which tracks the market's expectations of 30-day volatility in the S&P 500.

Although the index can be somewhat confusing, the most important point is that the Vix and S&P 500 are inversely correlated. That is, gains in the Vix are typically bearish – they suggest the S&P is going lower. Conversely declines in the Vix are typically bullish – they suggest the S&P is going higher.

And looking at chart patterns, Sebastian can't help but note that S&P 500 keeps hitting the same levels, while the Vix moves to progressively higher levels each time.

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Specifically, the S&P is fluctuating and hovering around the 1640 to 1650 level, but can't seem to break through. And the past 3 times that's happened, the Vix has climbed higher and higher.

Sebastian finds this extremely worrisome, because a similar pattern emerged in 2010 and then again in 2011. Both times the market sold off hard – making declines of about 15%.

He thinks we could be due for a similar pullback.

Considering the S&P has already gained 15% for the year, simple profit taking could drive a lot of the selling.

Therefore, Sebastian thinks this is a moment to sit on the sidelines.

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Even though he predicts pain, Sebastian also notes that those sell offs in 2010 and 2011 ultimately made excellent buying opportunities. That's a pattern that he thinks will likely repeat itself, too.

But that involves a longer time horizon. In the near-term, Sebastian sees every reason to proceed cautiously.

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