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Cramer's charts suggest oil prices are about to fall off a cliff

  • "Mad Money" host Jim Cramer takes to technician Carley Garner's charts, which are sending bearish signals about the price of crude.
  • As the market approaches a historically bearish time of the year for oil, Garner helps Cramer consider the possible outcomes.
  • Cramer also examines copper to see if oil's the only big commodity in danger of decline.

With commodity watchers concerned about the fate of Texas' oil refineries after Hurricane Harvey, CNBC's Jim Cramer wanted to nail down the condition of oil itself.

So the "Mad Money" host went off the charts with technician Carley Garner, the co-founder of DeCarley Trading and Cramer's colleague at RealMoney.com with a nearly spotless track record on calling oil's moves.

"The trouble with the oil market right now, in Garner's view, is that the buyers all feel like eternal optimists and they won't let multiple failed rallies stand in the way of their conviction," Cramer said.

The problem is that since West Texas Intermediate Crude, the market's general barometer for crude oil prices, peaked in January, oil prices have been sliding, making a series of lower highs.

Since then, each time oil has climbed significantly higher, speculators have gotten more bullish, and each time, Cramer has seen them let down because oil has been stuck in a trading range.

"We've made this point before, but Garner thinks ... it's worth stressing now, because we're currently approaching what's historically been a bearish time of year ... for the oil markets and she wouldn't be surprised if the bulls just get blown out here," the "Mad Money" host said.

To build Garner's theory, Cramer turned to the weekly chart of WTI crude, which includes the CFTC's Commitments of Traders Report. Garner uses the report as a tool to measure the level of fear or complacency in the futures market, which gauges traders' price predictions.

The report provides data on the futures positions of money managers, smaller speculators and commercial hedgers. Futures contracts obligate investors to buy given commodities at a predetermined date and price.

With oil, large speculators owning a lot of futures contracts has generally been a bad sign, since it means that buyers have run out of firepower, Cramer said.

"As of the latest report, large speculators [were], once again, awful. They had a net long position of 445,000 futures contracts. Now, that is shy of the 500,000-plus reading we had earlier this year — also at elevated levels, though — but Garner says it still points to an extremely one-sided trade," Cramer said. "In short, if hedge fund managers were going to bet on oil, they've probably done it already, which means there's little chance of fresh money coming in to push up the price of crude."

Traders can also make matters worse by selling their future positions and driving down the price of oil. To Garner, historical action like this is a large part of the problem.

Over the last 15 years, oil prices typically plunged from August to December amid waves of selling. Even though that may not necessarily happen, it could still threaten oil's range, which is between the low $40s and low $50s.

Garner said oil's floor of support ranges from $40.90 to $42. Because oil prices have been making lower lows in recent months, Garner is concerned that an overly dramatic dip could send crude down as low as $35.50.

"Here's the thing: if Garner's suspicions prove to be correct and oil does pull back down to the mid-$30s, she thinks then it would be an absolutely fabulous buying opportunity. If you want some oil exposure, maybe it's a good idea to take her advice and wait for a major decline before you pull the trigger," Cramer said.

Garner's predictions on oil made Cramer wonder if oil is the only big commodity in danger, so he turned to copper. The metal has been climbing thanks to a weakening dollar and Chinese demand, but Garner thinks copper may be nearing the end of its rally.

"When you check out both the weekly and the daily charts for copper, you see a bunch of indicators that suggest it's already way overbought," Cramer said.

He added that the Relative Strength index, which tracks changes in price movements, is running high on both charts, which typically means a correction is on the horizon.

"Here's the bottom line: The charts, as interpreted by our go-to commodities person, Carley Garner, suggest that crude oil could soon fall off a cliff while copper might be running out of momentum," Cramer said. "Neither of these is what I'd call a good sign. You know what? I'm on board with both calls."

WATCH: Cramer's commodity charts signal bearishness for oil?

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