Cramer's 'Mad Money Recap': Tricks for Buying and Selling

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Editor's note: The following is a recap of a "Mad Money" episode that originally aired June 19, 2007.

Jim Cramer let viewers of his "Mad Money" TV show in on something special: five methods to his madness.

"I know this show is the craziest, most random and frankly most bizarre thing on television, but I also know that you won't find stock advice this good anywhere else," he said.

"How do I pick stocks? That's the question that everybody would love to know the answer to. Tonight you get a piece of that answer."

Cramer: Make Money With Natural Gas

First, one of the easiest ways that he identifies potential Cramer names -- the stocks that might end up on the show -- is by watching the new-high list.

"Stocks on that illustrious list, the highest of the high, obviously have something going for them," Cramer said. "Either they're part of a major bull market, or the individual stocks themselves have serious momentum. No matter how they get there, most stocks on the new-high list keep going higher."

However, he doesn't simply pick names off that list. "That would be lazy and irresponsible," Cramer said. Instead, he waits for something to pull back from the new-high list.

"This gives you a good, lower-priced entry point in a stock that's probably going to rebound," he explained.

At the same time, market players should only buy stocks that have pulled back from the list if they are confident that these stocks will make a comeback. "You have to do all the same homework you'd ordinarily do before buying a stock," Cramer stressed.

"And the biggest caveat of all: When you're shopping for stocks that have pulled back from their highs, make sure they haven't pulled back for a good reason."

Insider High

Cramer's second method to his madness is that if insiders are buying a stock when it's at its 52-week high, "that is a clear sign that you want in."

Cramer said he loves it when he sees insiders buying at the high, because "it's a great sign of their confidence in the business."

Sometimes insider buying is "meaningless" and, on its own, an "insufficient" reason to buy a stock. "A lot of times you'll catch insiders buying their stock because they want to give the impression of confidence, to create an illusion that they're doing better than they in fact are," Cramer said.

But then there are times when there is "truly colossal" insider buying. "It's a pretty powerful endorsement when the insiders buy a whole lot of stock," especially when the buying is occurring at the stock's high, he said.

"It's a pretty good reason to give someone the benefit of the doubt," Cramer said. "These guys are not going to buy at the high unless they have some unshakeable conviction about their companies."

Most investors are smart enough to wait for a pullback before they pull the trigger. Therefore, insider buying at the high tells Cramer that investors don't believe there will be a pullback, "and there's nothing more bullish than that," he said.

The bottom line on Cramer's third method is that insider buying, coupled with a heavy short position, also equals a buy, Cramer said. "This is an explosive combination, and more often than not, it means there's going to be a short squeeze," meaning that the shorts will start buying to cover themselves.

Smart Shorts

"Shorts are smart. In fact, a lot of the time they tend to be smarter than regular long-side investors, but they don't know more about a business than the insiders who run it," he went on to say.