Here’s a trader’s totem: Forget about where the market closed and focus on where the lows were each day. You look for what's called a “retest” of those lows. Here's what we hit: Monday, the low was 12,608. Tuesday, it sank to 12,086 intraday. Wednesday saw a bit of a bounce back, increasing to 12,186. Thursday, the low came back down to 12,059, roughly the same low as Tuesday. Today, the market closed right at the low of the day, a particularly horrid close, down to 12,109. It was hideous and almost seemed motivated purely by people who wanted to blow the market up. This was caused by bears intent on breaking the spirits of all you Home Gamers and getting you to panic. That's their game. Cramer knows it well. He played it before he turned state's evidence, er, before he got this show. There’s a silver lining, though.
Notice how the market never dropped below those Tuesday and Thursday lows. In fact, it bounced off that low viciously. If you want to get heavily into the gibberish, there are some people who'd call that a successful retest coupled with a V bottom, or a so-called whoosh. A whoosh is complicated industry jargon that means the market went down hard and then bounced. Another word for that is a crescendo bottom, just like in music. It's loud, it's noisy, and everyone who wanted to get out managed to. Today's trading was sloppy, but we're looking at the totem. What matters is the sense that Tuesday's low held. It's a sign of stability, and you can rest assured some of the best traders out there will believe wholeheartedly in a whoosh/crescendo/V-bottom.
If you need something to clutch in order to stay in the game, the crescendo bottom is it. We've had at least half a dozen of these bottoms that have actually worked, but personally Cramer tends to discount them unless the market's extremely oversold – another technical term meaning we've been down so much for so long that the market will act like a coiled spring. The whoosh is a totem. Cramer put the odds of this being a legitimate one at about 50%.
OK, that’s enough voodoo. Now you need to plan because Cramer says it’s still likely that the market isn’t done going down. Take this weekend and use it to rank your stocks on a scale of one through four like Cramer ranks the stocks in his charitable trust at the end of every week. Ones are stocks you want to buy no matter what. Twos you'd buy if they go lower. Threes you'd sell if they rally. Fours you want to dump no matter what.
Come Monday morning you take all your fours, the stocks you just don't like at all, and you sell. When Cramer was on the trading desk, they called these stocks "maidens." They're the maidens you throw into the volcano to appease the gods of trading. What you're really doing is repositioning, taking money out of the stocks you don't have conviction in, and putting it into stocks you really like. Cramer calls it circling the wagons. You protect only what you have the resources to protect.
If the sell-off continues, you have an opportunity to buy more of your ones and twos, especially with the cash raised from selling your fours. If there’s a rally, you can sell your threes and wait for another sell-off.
If there's no bottom and the market keeps sinking, re-rank your stocks. Ones become twos, twos become threes, threes become fours. Follow this pattern if things keep getting worse. The worst thing that happens is you miss a rally in the stocks you dislike, and end up defending a portfolio you've got more conviction in.
Bottom Line: You want the voodoo? You can cross your fingers and believe that we got a crescendo bottom on Thursday. Go ahead and believe that, just so long as you use the weekend to reposition yourself into better names – your ones and twos, preferably defensive stocks with high dividends and buybacks.
Questions? Comments? firstname.lastname@example.org