Charts suggest S&P 500 may struggle in August while gold looks set to rally, Cramer says

Investors may be able to find positive returns in gold while the S&P 500 enters a historically challenging month, CNBC’s Jim Cramer said Monday.

“The charts, as interpreted by the legendary Larry Williams, suggest that August could be a tough month for the S&P 500, but a terrific month for gold. Given the big picture backdrop right now, that wouldn’t surprise me one bit,” the “Mad Money” host said.

“Remember, during the original debt ceiling debacle a decade ago, the stock market broke down and … gold did great,” Cramer added, alluding to the fact a two-year suspension of the debt ceiling expired at the end of July and Congress now needs to either raise the government’s borrowing limit or pause it once again.

Looking at the S&P 500, in particular, Cramer said Williams sees diminishing breadth when tallying the number of advancing stocks versus declining stocks. This is in addition to a difficult seasonal period for the broad equity index, which is up 16.8% year to date, Cramer said.

“Just since the beginning of the summer, [Williams] can point to three moments when the S&P rallied to higher highs but the Advance/Decline line failed to make a higher reading, meaning the market went up on not-so-hot breadth,” Cramer explained.

“For Williams, that suggests lots of big money managers must be selling many of their positions. He says he’s seen this pattern before and it’s not healthy. Normally when stocks rally, the Advance/Decline line should be making new highs. But that’s not happening and it means this move could have feet of clay,” Cramer said, while disclosing Williams has taken a “small” short position in the E-mini S&P 500 futures.

The technician also sees bearish signals in a momentum indicator known as on-balance volume, which is calculated by adding S&P 500 volume on positive days and subtracting it from negative days, Cramer said.

“The S&P makes new highs, but the On Balance Volume stays flat. That’s another negative. Remember, for technicians, volume is like a lie-detector. When it’s weak, that means a move is deceptive. One more reason Williams is worried about the rest of this seasonally challenging month,” Cramer said.

On the other hand, Cramer said Williams’ analysis shows a more optimistic near-term outlook for gold. “Williams is long gold for precisely the same reason he’s worried about the S&P: The seasonal pattern,” Cramer said.

Additionally, Cramer said data from the Commodity Futures Trading Commission shows commercial hedgers have recently been buying gold futures in a robust fashion, which historically has led to “a nice rally.”

Gold’s value in comparison to Treasury bonds is another piece of information working in favor of the precious metal, based on Williams’ analysis, Cramer said.

“As you can see from the chart, not only does the precious metal have a powerful seasonal trend on its side … but it’s extremely undervalued versus the bonds,” Cramer said.