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Cramer's favorite market indicator is signaling a potential dip

  • "Mad Money" host Jim Cramer returns to "Mad Money" with a fresh take on the stock market supported by one of his trustiest indicators.
  • Cramer puts the S&P Short Range Oscillator's latest moves in context with the recent market correction.

After an extended Olympics-induced break, CNBC's Jim Cramer wanted to get back to the market basics he has put forth for investors over the years.

"We know that earnings can be ephemeral, bonds can be fickle and the Fed can be downright enigmatic, while currencies and commodities spook easily," the "Mad Money" host said Monday.

"We need something that's solid as bedrock, which is why I subscribe to a product called the S&P Short Range Oscillator — I've been following it closely every single day of my life since back in 1987. It's the single best indicator of whether the market's overbought or oversold, meaning it tells you when we've gone too far too fast in one direction."

When the stock market began a multi-day sell-off two weeks ago, the oscillator gave investors a negative-10 reading — the lowest in three years and one of the worst Cramer had ever seen.

The reading meant that stocks were dramatically oversold, almost as oversold as they were two years ago, when the Dow reached 16,000 after a several-thousand-point decline.

But Cramer noted that Dow 16,000 marked the start of one of the greatest rallies in history, which lifted the index to 26,000 without skipping a beat.

"In other words, the oscillator is the single best way to detect capitulation. When the weak hands finally surrender, beaten-down stocks can take off like a rocket," Cramer explained. "The extreme negativity from all the overselling is really why this market bottomed. ... In the midst of the panic, it was the only signal that got you to buy."

After all, one of Cramer's most important pieces of advice for investors is that their fellow shareholders can be even more damaging to stocks than the broader market. As soon as the forced selling starts, smart investors must be prepared to buy something before it stops.

But the buying window from the market's most recent correction has already closed. Stocks have started to erase their losses as investors warm back up to the strong state of U.S. business.

Cramer listed a number of reasons for the recovery: President Donald Trump's pro-business administration and deregulation efforts; the U.S.-led turn in oil markets; the overall strength of the global economy; and the increasing number of investable stocks in the market.

Stocks of cyclical companies like Caterpillar and Boeing — both industrials whose success is tied to economic growth — are among the most popular with Wall Street buyers.

"Companies like Caterpillar and Boeing benefit from two shortages: a shortage of their products thanks to high demand and a shortage of their stocks thanks to their own endless buybacks," Cramer said.

"It's the holy grail. The combination leads to inexorably rising earnings estimates that, as Warren Buffett told Becky Quick this morning, will not be stopped by a small increase in interest rates like we've had, especially not when we have a weak dollar and a booming global economy," he continued.

Still, investors have reason to be wary of the market's snap-back. Cramer pointed out that the VIX-related exchange-traded products that exacerbated the sell-off could still wreak havoc.

As a result, Cramer advised investors to "maintain a higher cash position" and sell high-yielding stocks that don't offer as much protection in this environment as some may hope.

"There are a lot more buys than sells now in this market, although timing has become a lot more important. The false demons of higher interest rates will play havoc with the bullish angels, but thanks to the exceptional earnings power of actual companies, you can use any meaningful dip — even intraday, intra-session — as a buying opportunity," Cramer said.

"Now, you have to be careful," he continued. "The oscillator I mentioned before that I swear by? It's now [at] plus-4.6 after the run, meaning we're getting overbought. So you may just get your chance to buy into weakness sooner than you think, and it will be sudden. Is it too late to buy? Let's just say you need to be more selective, but the fates may give us a session within a session that produces cheaper prices. If that happens, please be ready to pounce."

WATCH: Cramer reviews what you may have missed during the Olympics

Disclosure: CNBC parent NBCUniversal owns NBC Sports and NBC Olympics. NBC Olympics is the U.S. broadcast rights holder to all Summer and Winter Games through the year 2032.

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