Every week Jim Cramer works with technicians in "Mad Money's" Off The Charts segment to look for chart patterns that can predict the next big stock moves. While Cramer is certainly not a chartist, he understands technicals play a vital role in understanding if a big move is the real deal.
"Why do charts work? First, you must consider them as if they are footprints at a scene of a crime. These footprints trace out what big money managers might be doing with their buying and selling of stocks," the "Mad Money" host said.
The second reason to care about charts is that Cramer finds there is a remarkable self-fulfilling nature of charting stocks. Some of the best investment ideas can come from chart inspired brainstorming sessions — though Cramer thinks that the best way to produce results is with a careful melding of both fundamentals and technicals.
Sometimes technicians start by comparing the chart of an individual company to the chart of an average to determine the legitimacy of a move. This is what is known as confirmation.
For instance if the Dow Jones industrial average hit a new high, historically it is not sustainable unless the Dow Jones transportation average also hits a high, or confirms the breakout status of the Dow itself. So, if both the industrials and the transports hit a new high, Cramer considers the move to be one he can bless as being legitimate.
"I like to see all of these indices move up in sync before I truly bless a market move. You get all of these indices rolling higher, and you have to put the maximum amount of chips on the table," Cramer said.