Cramer: Never fooled again! Signs of a real bottom

Trader on the floor of the New York Stock Exchange.
Brendan McDermid | Reuters
Trader on the floor of the New York Stock Exchange.

After a brutal day that raised the hopes of investors and then crushed them, Jim Cramer decided to discuss what a genuine market bottom looks like, so that Wall Street isn't fooled by another nonviable bounce again.

"When you are searching for a bottom, most people want to nail one specific moment and say here—this low and no lower. But bottoms tend to be less of an event and more of a process," the "Mad Money" host explained.

That is why Cramer turned to Bruce Kamich, a chartered market technician who is a professor at Baruch College, and colleague of Cramer's at TheStreet.com. Kamich pointed out that traders like to look for 90 percent down days as a starting point.

One of those days was Monday, where 90 percent of the total volume is down. That indicates that the selling has run its course and the weak hands have been obliterated. Another sign of a typical bottom is that the market stops being hammered with bad news.

However, Kamich thinks that even though the market had a dramatic intraday low on Monday, it will retest that low again before investors should feel comfortable in a bottom.

One important sign of a bottom can be seen by the number of new 52-week lows in individual stocks. While it might seem counterintuitive, Kamlich said that in order to have a real bottom the number of 52-week lows needs to dry up.

Unfortunately, there were 1,154 new 52-week lows on the New York Stock Exchange on Monday. That is a lot, and it suggested to Kamich that the market is still only in the early stages of a bottom.

Kamich also advised that just because there has been a huge cascade of selling in the market recently, that doesn't necessarily mean the pain is over. It is highly likely that the averages could have another nasty leg down, even as some sectors have rebounded better than others. Kamich thinks those outperformers in the next selloff will be the stocks to buy when the market is back in bull territory.

Additionally, September has historically been the worst month of the year of the S&P 500. Thus, Kamich anticipates that the market will retest this week's lows again in late September or early October. Then the market may be able to put on a sustained rally.

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Ultimately, Kamich's analysis determined that it is still too early to call a bottom in the market. Bottoming is a process, and investors are still in the early stages of that.

"I think there are plenty of stocks that are still in the blast zone, but you also have to be ready to pick at the higher quality names you like into any additional weakness and leg into them," Cramer said.

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