The bulls finally found their footing Wednesday, prompting the averages to end in the green. But Jim Cramer was still suspicious, wondering if investors just saw a successful re-test of lows, or was it the calm before the next storm? Did investors really have a moment of rationality, or were the sellers just exhausted?
Those were all four reasons why the market could experience an up day, and Cramer was determined to find out which one helped to explain the rebound.
When the entire market goes down viciously and then rallies back to where it was before, most technicians will expect a retest. Meaning, they expect the market to retreat back to its previous lows seen before the rally. And while Cramer is a fundamentalist at heart, he likes to pay attention to the technicals in order to figure out when he will have a chance to buy stocks.
In Cramer's research, many lows were previously reached last Monday and Tuesday so he fully expected those levels to be revisited again.
But guess what? Despite how hideous the market was on Tuesday, only 77 stocks took out their lows from last week. So by the end of Tuesday, Cramer realized many chartists were going to react positively that stocks had so many few lows and would feel ready to buy. Sure enough, technicians seized control on Wednesday and the averages snapped back.
Another gauge that Cramer likes to use is sentiment. He first looked at the Standard & Poor's proprietary oscillator, which measures how overbought or oversold the market is. Then he looked at the Investors Intelligence bull-bear poll of newsletter writers.
Neither was perfect. The oscillator indicated the market was completely oversold, but considering circumstances are not as dire as they have been in the past, Cramer interpreted that as a sign to do some buying.