So, while homework on the fundamentals of a company is still important, it's a bad idea to pull the trigger on a stock without looking at the chart first.
Sometimes, finding a bottom after a long decline can be incredibly lucrative. In 2009, when the market was in a severe decline, Cramer had the sense that the decline's velocity was lessening. He then began looking for the most bulletproof stock he could find.
He came up with AT&T, which had a lot going for it with a roll out of the Apple iPhone that was expected to produce record profits for the company.
Cramer first checked with four chartists, who all agreed that AT&T had a strong foundation. They also agreed that it had established a nadir in 2008 at $21 with the tsunami of selling. They figured this out by looking at the volume and saw that it had expanded to a level far in excess of a normal period's trading. That was a sign that the sellers were exhausted.
"As long as sellers overwhelm buyers with their dumping, no base can form. A climax is a sign that those potential sellers who had been holding on for some time are finally giving up en masse," Cramer said.
Investors can determine if a stock is overbought or oversold by charting the ratio of higher closes, also known as the relative strength index, or RSI. This is a momentum oscillator that measures the direction that a stock is going, and the velocity of the move.
Cramer also matches the RSI of an individual stock to something else, maybe the relative strength of its sector or a larger index, and then measures the price action historically. He looks for anomalies where strength stands out, because that is a sign that there is a pending move or a change in momentum.
The inverse can also be true; a stock can also fall so fast that investors should expect it to snap back because it is technically oversold. These patterns are reliable indicators that a change in direction is about to occur, and are terrific action points.
So, for investors that are debating whether to buy a stock, have done all the research and find that the stock is overbought, Cramer said to wait for the inevitable pullback that almost always happens.