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Game Plan: Expect a Rally

Published: Friday, 13 Jun 2008 | 7:22 PM ET

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By: Tom Brennan
Web Editor, Mad Money

Cramer usually scoffs at technical analysis and its accompanying stocks charts. In fact, he likened the practice to astrology during this week’s Game Plan. He just can’t get with the idea that because some graph says a stock will drop, it will.

But admittedly there is one tool of technical analysis that hasn’t failed Cramer, he said, since 1987. The Standard & Poor’s Oscillator. It measures the amount of stock buying relative to selling in the market.

When the buying and selling are about the same, the oscillator reads zero. Multiple days of buying, though, push the oscillator up. It signals that stocks are out of equilibrium. Over the past three years, any time the oscillator hit +5 it’s been a sign that profits should be taken, because some kind of decline is inevitable.

The reverse is also true. Overselling sends the oscillator down. No matter what the market has looked like, Cramer has always bought stocks when the oscillator’s dropped to –5, he said, because that dip has been followed by a rebound.

Well, Friday morning the S&P Oscillator hit –6.

“There has been no time in the last three years – not once – that we didn’t have a huge rally after this oscillator has fallen to these levels,” Cramer said. “Very simply, I believe that means it’s time to buy.”

The banks are likely to rally, he said, specifically mentioning Wells Fargo [WFC Loading... () ] and JPMorgan Chase [JPM Loading... () ]. Lehman Brothers [LEH Loading... () ], though, should not be bought.

Some tech stocks should move. Cramer said he likes Research in Motion [RIMM Loading... () ], Salesforce.com [CRM Loading... () ], Hewlett-Packard [HPQ Loading... () ], Google [GOOG Loading... () ] and IBM [IBM Loading... () ].

Ingersoll-Rand [IR Loading... () ], Emerson Electric [EMR Loading... () ] and Parker Hannifin [PH Loading... () ] are new-tech names worth owning. L-3 Communications [LLL Loading... () ] in defense got the nod as well.

Even the housing stocks could earn a profit, Cramer said. Owens-Corning [OC Loading... () ] and Toll Brothers [TOL Loading... () ] stand out. In retail, Costco [COST Loading... () ], Wal-Mart [WMT Loading... () ] and Jones Apparel [JNY Loading... () ] made the list, and so did VF Corp [VFC Loading... () ].

What can’t you own? Here’s the rule, according to Cramer: “You don’t buy what’s overbought when you’re oversold.” That means steer clear of oil and gas stocks for the time being, he said. There could be a chance to buy these names in the near future at a better price.

“When the oscillator signals extreme I think you have to make a move,” Cramer said. “And I believe the move is now to buy, buy, buy.”

“The rally you saw today is the beginning of a multiday rally,” he continued. “You haven’t missed a thing.”

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Game Plan: Expect a Rally