TheStreet.com TV Recap: Sussing Out the S&P Oscillator

Now that Standard & Poor's proprietary oscillator is at minus seven, the market looks like it's poised for a pullback, Jim Cramer said on TheStreet.com TV's Wall St. Confidential Web video Friday. And that means it could be a good time to buy, he said.

S&P's oscillator, he said, is used to measure how overbought and oversold a market is.

Historically, over a 20-year period, Cramer said the oscillator has never let him down. It has certain periods when its readings are really high. That is when market players should sell, he explained. Then there are certain periods when the oscillator is really low, very negative, and that's when people have to buy.

Cramer: Prepare For a Pullback

"Both times, in August and seven days ago, the oscillator was off the charts at negative seven," Cramer said. "At minus seven you have to cover your shorts and get long because there will be some reason for a rally."

There's only one time when this oscillator hasn't worked, he said, and that was in 1987. All the other times it has been accurate.

"When the oscillator is over five, people must sell, regardless of how great it looks," Cramer recommended. "There have been some [times] where the animal spirits of the market have been so great that it's gone to plus nine and 10, but the percentages on the upside are that there's going to be a selloff. It may not be major, but I do believe it will happen."

When it's over five, if he were fully invested, Cramer said he would cut to being 75% invested. At this time, short-term traders should maybe go 50% invested, and "if you're a guy who is able to short, maybe 25% short," he said. "That's how much I have faith in this indicator. I have faith in almost no indicators other than this one.

"Helene Meisler, [a contributor to RealMoney.com does] her own oscillator work," Cramer said. "She seems to agree with me on the site. When we both agree, we tend to have a pretty powerful correlation between right and wrong."