Cramer: Is S&P Bouncing or Bottoming?
The S&P closed little changed Tuesday after moving sharply higher earlier in the week.
With stocks unable to continue their advance, investors have started to question whether Monday's action represented a real, meaningful bottom for the S&P.
Or was it just an opportunity to take some profits before stocks head back down?
"That's the big question in this market right now," Cramer said on Tuesday's broadcast.
And when pros attempt to answer a question of this magnitude, they often turn to technical analysis. The Mad Money host chose to consult with Carolyn Boroden, who runs the website FibonacciQueen.com and Cramer colleague at RealMoney.com.
Boroden thinks the rally earlier in the week was definitely important despite the subsequent pullback.
According to Boroden's technical analysis, what matters is that when the S&P made its latest low on Friday, it did so near some very important levels 1343 – 1346. That's meaningful because:
- There was a 61.8% retracement of the rally from the June 4th lows to the peak on September 14th, which created a floor at around 1346.
- And there was also a 100% projection of a prior decline, from the October 2011 high to the November 2011 low, which put in a second Fibonacci floor at 1340.
If that's a little wonky, the important takeaway is that the S&P bottomed right near these two levels – as a result Boroden think that it could be an important low - not just one more step on the way down.
"Often times when a technician sees these clusters of Fibonacci relationships, it can mean that the trend is about to change course, and in this case that would be a very good thing," explained Cramer.
But that's just one part of this story, Fibonacci analysis applied to the time axis of the charts also yields meaningful results.
From the peak on April 2nd to the trough on June 14th, the decline lasted 43 trading days from high to low.
If you watch the video and look at these charts used in the analysis, you'll see that big declines or advances will often last for about the same number of days before petering out.
"So when Boroden sees that it was also 43 trading days from the September 14th high to the low last Friday, she thinks that's a big deal. It could mean that the decline has run its course," said the Mad Money host.
And when you take these significant data points in tandem, technical analysis would suggest the recent low in the S&P 500 should be considered pivotal.
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Now, that doesn't mean investors are looking at smooth waters. They're not. Right now the S&P has three ceilings of resistance that could potentially keep a lid on things.
- The first resistance level is between 1381 and 1388.
- There's also a thick wall of resistance from 1433 to 1450.
- And 1391 is a level at which previous rallies would become exhausted.
However, Boroden also thinks the market has the potential for a healthy rally and if it appears the S&P has enough momentum to break above these key levels, then she thinks the S&P could rally all the way up to 1510.
What's the bottom line?
According to technical analysis from Carolyn Boroden, Monday's rally wasn't just any old move. It could be the beginning of a real turn for the S&P, because her chart work suggests that the index may have made a pivotal low on Friday, and perhaps, just perhaps, a real bottom.
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