Charts suggest near-term market pain may be over, but don’t expect a big rally, Jim Cramer says

CNBC’s Jim Cramer said Tuesday that the market will likely move sideways instead of experiencing a monster rally when it recovers, leaning on analysis from DeCarley Trading market strategist Carley Garner.

“The charts, as interpreted by Carley Garner, suggest that the near-term pain might soon be over, but you can’t expect us to go back into turbo-charged rally mode. Instead, she expects a long period of sideways consolidation as we work off the froth created in 2020 and 2021,” the “Mad Money” host said.

He highlighted two important facts to remember when considering the current market:

• We are currently at the heart of earnings season. Garner believes “declining markets often find support from quarterly earnings, especially when the seasonal trends are on your side, which they are supposed to be now,” according to Cramer.
• Commodity prices have moderated and the bond market shows some signs of stability. Garner’s “not predicting blue skies from now on, but she at least believes this market’s headed for a holding pattern where we could see some surprising strength,” Cramer said.

To support his interpretation of Garner’s chart analysis, Cramer first showed the daily chart of the CBOE Volatility Index, also known as a fear gauge, going back to 2020.

“What the VIX directly measures is how urgently traders are buying put options on the S&P 500 to hedge their positions. … Because the VIX and the S&P 500 tend to move in opposite directions, you can expect a peak in the volatility index is good news for the stock market,” Cramer said.

He said that Garner sees the VIX making a head-and-shoulders formation, which is a reliable pattern showing signs of a potential peak.

“While the VIX is currently over 30, as long as it doesn’t break 35 and start again — completing the head-and-shoulders pattern — Garner sees it heading much lower, perhaps back down to the teens. Again, that would be hugely bullish for the market because when the VIX goes down, the S&P almost always goes up,” Cramer said.

Cramer then reviewed the Nasdaq 100’s monthly chart. “This is … the worst start for these stocks since 2008,” he said.

The index has pulled back significantly over the last five months, but the current correction is still small compared to the 20-month-long rally from March 2020, according to Cramer.

“Let’s put it this way: From the bottom in 2009 to the peak in 2020, the Nasdaq 100 rallied 7,000 points. … If the index had stuck to its old uptrend, where would it be? Garner points out that it would probably be around 8,000 points higher, not 13,000,” he said.

“While she doesn’t expect to see a sell-off of that magnitude, she can’t completely rule it out either,” he added.

Zooming in on the Nasdaq 100 daily chart shows that the index went below a trendline going back to the lows of March 2021, Cramer said.

“Unfortunately it broke down below that trendline just today. To Garner … we are now at a make-or-break moment,” Cramer said. “If it stays stuck below this key support line … the next floor is 12,500. And if we do get that kind of pullback, though, she thinks it would be an attractive opportunity,” he added.

Lastly, Cramer took a look at the daily chart of the S&P 500.

“According to Garner, Monday’s daily price bar was a textbook key reversal pattern: The market opened sharply lower and ultimately closed higher. … It’s a coin toss whether or not this reversal pattern the other day will mean anything,” Cramer said.

Sign up now for the CNBC Investing Club to follow Jim Cramer’s every move in the market.

Disclaimer