Cramer says market could rally another 4% before continuing its bearish moves

  • CNBC's Jim Cramer says trading history shows that stocks could continue Monday's rally, especially if things go right with trade, oil prices, the Fed and Europe.
  • All four factors will determine how stocks will fare in this bear market, the "Mad Money" host says.
  • Still, investors should never mistake a bounce for a sustained move higher, he warns.

Monday's reversal in the stock market could be the start of a bounce for the largely oversold equity cohort, CNBC's Jim Cramer said as stocks recovered from their Thanksgiving-week declines.

Stocks got "very oversold" on Friday amid a plunge in oil prices and technology-led weakness, said Cramer, noting that the paid S&P oscillator he follows hit the minus-5 level during Friday's trading, a signal that the selling was too rash.

"That's the crux of this move," the "Mad Money" host said as the Dow Jones Industrial Average posted its best day in over two weeks. "In this particular bear market, we've had three significant declines where the oscillator's gone below minus 5, and each time, the selling got too aggressive and it's produced, roughly, about a 5-percent bounce."

So, according to history, the move isn't over, Cramer said. Still, investors should "never confuse a bounce with a sustained move" higher, he said, reiterating his call that stocks are still in a "bear market."

"We could rally another 3 or 4 percent before the oversold bounce exhausts itself," Cramer said. "But, please, never confuse a bounce with a sustained move, because the only sustained move we've seen since the early-October meltdown has been a sustained move lower."

But there are four things that could prolong the surge, the "Mad Money" host said. First is trade with China, which now hinges on President Donald Trump's scheduled meeting with Chinese President Xi Jinping at this week's G-20 summit.

"I say don't get your hopes up," Cramer said, noting the Trump administration's hard line on China's trade practices. "Then again, anything can happen in a couple of days worth of smiles, including a possible stay of trade execution on the 25-percent tariff that's supposed to come into play in January if we don't get some kind of agreement."

Second, oil prices could find bottom thanks to a drilling slowdown in the United States, where price-per-barrel declines have made it less profitable for oil producers to extract the commodity because of a shortage of available pipelines, Cramer said, citing the latest Baker Hughes rig count.

"If producers do cut back on drilling and oil prices find some sort of new equilibrium at these levels, ... that would be pretty positive for the stock market," he said as oil prices stabilized. "It means lower prices at the pump [and] you get some layoffs in the red-hot energy industry, something that will make the Fed less likely to keep tightening."

Third, Federal Reserve Chair Jerome Powell will speak publicly on Wednesday, and if he even hints that he is willing to review the data after the Fed's widely expected December interest rate hike rather than raising rates on autopilot in 2019, it'll pay off for stocks, Cramer said.

Any such sign would "be viewed as pure gold by the market," he argued. "If we get a prudent statement from Powell ... based on declining commodity prices, slower housing [and] slower autos — thank you, GM, for the gigantic pre-Christmas layoffs — that would ignite a vicious short squeeze. That would be the other 2.5 to 3 percent [rally] that could happen."

Fourth, resolutions on Brexit and Italy's budget crisis could provide a final leg up for the market, the "Mad Money" host said. Progress in either situation could lead to a weaker U.S. dollar, which would boost overseas earnings for global, U.S.-based companies.

"Here's the bottom line: we get a rally reprieve, especially if Salesforce.com gives us a good number tomorrow and a good forecast when it reports," he said. "There are some genuine positives that some real optimists can hang their hat on."

WATCH: Cramer on whether Monday's rally can continue

Disclosure: Cramer's charitable trust owns shares of Salesforce.com.

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