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 that the market was completely oversold, but considering that circumstances are not as dire as they have been in the past, Cramer interpreted that as a sign to do some buying.
The Investors Intelligence newsletter poll certainly isn't scientific, but involves checking in with a small amount of people who deal with stocks for a living. Cramer found that the number of bulls clocked in at 27 percent, the lowest level since March 10th of 2009. Believe it or not, this was a great sign for Cramer.
"If there are so few bulls and by extension so many bears, then there are a lot of people who could be converted to the bullish cause, whereas everyone who was going to turn bearish has likely already done so," Cramer explained.
And how about rationality? Cramer considered one measure of rationality to be the relationship between the decline in the price of jet fuel, the single biggest cost for airlines and airline stocks. Oil went down hard on Tuesday, but airline stocks declined anyways. What the heck?
Yet on Wednesday, even though oil did practically nothing, airline stocks jumped.
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As for seller exhaustion, there has been extreme volatility lately due to an endless parade of sellers. At this point, investors have seen a flash crash, extraordinary back-to-back days with the Dow down 500 points and trillions of dollars obliterated because of turmoil overseas.
In Cramer's opinion, there has to come a moment when remaining shareholders decide to stick with stocks for the long-term. Sellers become exhausted to keep dumping stocks.
"Sometimes a host of emotional and technical factors can coalesce to produce a positive session," Cramer said. (Tweet This)
And that was exactly what happened on Wednesday. In the wake of the bear's damage, the perfect factors came together to let the bulls for a day.