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How to Trade the Coming Bank Rally

Financial stocks, the group that led the bull market that started one year ago this week, look ready to rally again, Cramer told viewers on Tuesday.

After a seven-month stall-out, the chart of the Financial Select Sector SPDR , a key exchange-traded fund that mirrors the S&P Financial Index, is pointing to an imminent breakout. In fact, one of Cramer’s favorite technical analysts predicted the XLF could soar as high as $21 from its Tuesday close of $15.30.

Here’s the thesis: The analyst pointed to what is called an “island reversal,” which happened in XLF during October. The index gapped up, opening above its recent trading range at the time, and then gapped down shortly thereafter. On a chart, this island of activity is separate from the rest of the stock’s movements, and money managers view it as a negative.

That’s because the level where the reversal took place often serves as serious resistance for the share price, in this case the XLF’s, which topped out at about $15.50. But – and this is crucial to the thesis – money managers will turn bullish if the stock in question closes above that level. Well, the XLF is just 20 cents away now, which is why the technician is predicting a breakout.

The analyst is especially confident because the XLF over the past seven months has built a solid floor near $13.50 but also has been pounding the ceiling at $15.25. This long-term trend means that the investors who own the index are committed, and therefore the XLF should power higher once the resistance level is breached.

So what does Cramer think? One of his biggest gripes with technical analysts is that they’ll recommend a stock at one level but not like it at a lower price. But if the analyst here thinks $16.01 is a good entry point for the XLF, and he does, then Cramer thinks it is even more attractive at $15.30.

More importantly, though, Cramer endorses active stock investing over the passive buying of index funds. So rather than going with the XLF, he thinks investors are better off owning JPMorgan Chase , the ETF’s biggest holding (along with Bank of America , Berkshire Hathaway , Citigroup and others).

Cramer called JPM the best run of them all thanks to CEO Jamie Dimon, saying bank is well capitalized, the franchise got stronger even during the downturn and the company has taken market share. And the stock is cheap, too.

“If there’s going to be a renewed rally in the financials,” Cramer said of JPM, “that's the one to own.”

Cramer's charitable trust owns Bank of America and JPMorgan Chase.

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