Mad Money

Cramer's playbook for turning the market sell-off to your advantage

Key Points
  • "Mad Money" host Jim Cramer shares his tips for using sell-offs to buy quality stocks "on sale."
  • Sell-offs typically last three trading days before the market settles, and each day has a unique effect on stocks, Cramer says.
  • Using the stock of Amazon as an example, Cramer goes over how to play the pullback.
Turning the market sell-off to your advantage

Days when the stock market's top performers fall out of favor with Wall Street and investors turn to stocks they previously hated remind Jim Cramer of what sell-offs are really about.

"[It's] a chance to identify red-hot stocks that may have gotten away from you — but you didn't want to chase then because you had discipline — and are now cooling off, giving you a chance to scale into them gradually on weakness," the "Mad Money" host said. "Emphasis, by the way, on the word 'gradually,' because with the pessimists feeling so empowered, there's going to be more pain ahead."

Cramer's objective is to teach investors how to maneuver pullbacks carefully, so he advised homegamers to buy in stages on the way down as the latest sell-off runs its course.

Pullbacks tend to last three days, starting with the initial session when the market's high-flying names begin to fall.

Cramer tracked the three-day pattern using the stock of Amazon. After reporting weak quarterly earnings on Thursday, the stock proceeded to get squashed, down 3 percent in after-hours trading.

Day two typically consists of more selling, while the market's new favorites, the "losers" until the sell-off, slow their upward run, Cramer said.

"If you want to buy some Amazon ... don't be so anxious. Wait a bit," the "Mad Money" host said. "Don't buy it. Don't bite that first up, because it will do that. Wait for that rally to fizzle, and don't buy all you can."

Since trading volume is historically light on Fridays, Cramer said investors should not buy in all at once because any market moves will be magnified and stock declines could really hurt.

On Monday, day three, the negativity will continue, but down-beaten stocks should start to stabilize. Cramer said this is the time to make your next move, but only if your stock of choice is flat or goes down.

"Please leave some room for more stock on Monday, when the stock could start stabilizing," Cramer said.

"The bottom line here is that when we have a reversal day like today, the end-of-the-worlders grab the mic and they won't let go of it until the third day of the sell-off, when they say 'buy' all over again," Cramer said. "Instead of taking them too seriously, though, you need to use this weakness as a buying opportunity, as long as you remember your first buy may not be your only buy."

Watch the full segment: Cramer's sell-off strategy

Cramer's playbook for turning the market sell-off to your advantage

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