Investing Club mailbag: How to use Jim Cramer's trusted S&P Oscillator to interpret market swings before investing

Published Thu, May 18 20231:27 PM EDTUpdated Thu, May 18 20231:50 PM EDT

Hi, I'm a member and it's been great so far. However, I'm a bit confused about when to buy if the S & P 500 Short Range Oscillator shows the market is overbought. — Aditya A The S & P 500 Short Range Oscillator represents the index as a whole, and we like to use it as a guide on how the market is performing and where it may be headed in the near term. The Oscillator informs us at a high level as to whether we should raise or deploy cash, but it isn't a guide for how to manage individual holdings. In an overbought market, we begin looking for areas to raise cash because sellers are likely to enter the market in the near term in order to book profits. Or, at the very least, an overbought market means the risk-reward profile has deteriorated and we may be in for a period of consolidation. The opposite is true for an oversold market. That type of reading indicates that we should be looking more closely for buying opportunities, so that we can participate in the near-term rebound that oversold conditions generally precipitate. Every time we mention the Oscillator — Jim's most trusted guide for what to do during big upswings or downdrafts in the stock market — we're flooded with requests from Club members: "How can we access the Oscillator?" Well, we went directly to the source, our partners at MarketEdge, the data provider that publishes the Oscillator. We're excited to share that Club members can now get an exclusive discount for this helpful tool. Click here . Of course, we won't buy or sell any stock simply because of a reading on the Oscillator. For that, we still have to look at the fundamentals and potential future catalysts for individual holdings. There are, for example, times when an individual stock may diverge from the S & P 500 and present a buying opportunity — even when the Oscillator shows the market to be overbought. An individual stock can be oversold in an overbought market and vice versa, especially when only a handful of sectors are driving the direction of the index and others have fallen out of favor. In short, the Oscillator is more than anything a helpful guide on how to manage our cash levels given the market setup, before then reviewing individual holdings. But the Oscillator alone should never prevent an investor from taking action one way or another on a given stock. Ultimately, it's one tool in the toolbox and should be considered alongside the rest of an investor's research and homework. (See here for a full list of the stocks in Jim Cramer's Charitable Trust.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

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Hi, I'm a member and it's been great so far. However, I'm a bit confused about when to buy if the S&P 500 Short Range Oscillator shows the market is overbought.

— Aditya A