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Cramer: Ugly charts signal deeper correction ahead

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

Although Jim Cramer always bases investment decisions on fundamental analysis, he also thinks that technical analysis can provide valuable insights, especially when fundamentals are somewhat cloudy.

And with broad market weakness ebbing on Tuesday, like so many pros, Cramer can't help but wonder if the worst of the stock market storm has passed, or if we're simply between bands in a major system.

According to top technical analyst Carley Garner, you shouldn't put your umbrella away, just yet.

Kaan Tanman | E+ | Getty Images

She says there are too many bulls in the market for an advance to sustain.

That is, according to the American Association of Individual Investors Sentiment Survey, only 23.8% of people polled expect the market to go lower over the next six months. For Garner this is a classic sign of complacency, as that figure is much lower than the long-term historical average for bearish sentiment at around 30.5%.

At the crux of Garner's concern: there's still plenty of room for selling as the bulls ring the register and the bears come in off the sidelines and get some fresh short positions going.

Also Garner finds levels in the RSI or Relative Strength Index concerning.

It reached 78 late last year, an overbought level not seen since the market peaked in 2007. Although she doesn't expect a sell-off to be nearly as sharp as the one that followed in 2007, she does feel that any reading above 70 is a red flag.

Analysis from another top technician, Carolyn Boroden, leads to similar conclusions.

Boroden is cautious because the S&P has fallen below its 50-day moving average, and she believes it needs to clear that important hurdle, which is from 1808 through 1823, before you can buy stocks with confidence.

If the S&P can break above 1823, Boroden becomes optimistic but if it can't clear the hurdle, then Boroden suspects the market could be vulnerable to a much deeper correction.

Back to Garner, she thinks the S&P could decline down to its 100-day moving, a level that held three separate times in 2013. Right now the S&P's 100-day moving average is around 1,755.

Meanwhile, Garner sees problems in the chart of the Dow Jones Industrial Average, too. In this case, she says stochastics are falling precipitously from overbought levels, and that tells Garner the Dow could have more room to fall.

This index has been in an uptrend since September of 2011, and she thinks it could drop down to the bottom of the up-trend channel, which is currently down at around 15,000—so we're talking about a potential 900 point decline from current levels.

All told, the charts are troublesome.

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"We may have caught a nice bounce today, but the charts of the S&P 500 and Dow Jones, at least as interpreted by Carley Garner, are not on your side here," Cramer said. "Historically, when the S&P becomes this overbought, we almost always get a fierce correction—something even worse than the decline we've already experienced."

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