The Real Signs of an Intraday Rally

Take off your lucky hat and learn the rational, smart, empirical way to spot a coming upturn.
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Editor's note: This column is an update of a portion of the "Mad Money" episode that aired June 7. Click here to read the full Mad Money Recap for that episode.

We've been through a really bad stretch -- a lot of rough days. And I know that every day the market goes down, even just a little, you're sitting there hoping for an intraday rally.

I am here to break you. I'm going to crush that hope. You still can make money on a down day. You still can be proactive on a down day. But you cannot, you must not, hope for an intraday rally, because you probably won't get one. Just witness the sickening decline Wednesday after the session got off to what looked like a decent start. Now, this is not to say that intraday rallies never happen -- and after I explain why you get so few of them, I'll give you what you really need, the skills to call an actual, bona fide rally. But generally, we've got a Muhammad Ali market right now: It's run by the bears, and they not only knock stocks down, they can choose the round in which they will.

Waiting for an intraday rally is like waiting for Godot: It never comes.

Here are the facts that can save you and make you some money. On "Mad Money," we believe in rigor. We use numbers. And numbers tell me this: When the market's down and you think you're seeing a rally, you think you're getting levitation, you get the levitation scene from

Ghostbusters

, where Bill Murray finds Sigourney Weaver floating four feet above her bed and says, "I want to talk to Dana." Her answer, in demon voice: "There is no "Dana," only Zuul."

That's not a rally, that's Zuul! I know, you think you can predict the rally, you think they're due, but those convictions are wrong! You know what Nietzsche said? Convictions are more dangerous enemies of truth than lies. So let me give you the facts about rallies.

I ran a screen, with some help from my team at

TheStreet.com

, Dave "The Straight Man" Peltier and Mike "Diablo" Comeau -- and I have the numbers, the real, empirical, Bill James-style (if you're into baseball) proof that you just aren't gonna get an intraday rally. On days the

Dow

was down at least 0.5% in 2000, the market ended up only 9.1% of the time. In 2001, it was 17.7%. In 2002, 15.3%. In 2003, 13.9%. But then we get to the current market and things go south. In 2004, on days when the market was down 0.5%, it ended up only 6.3% of the time. Last year, it came back up into the black just 4.4% of the time, and so far in 2006, on the days the Dow's been down 0.5% or more, we've ended positive only 3.8% of the time.

Do you want to bet on those numbers? You can't argue with them; intraday rallies are rare, and you can't expect or rely on them. If you do, I can almost promise, except for the legal department, that you will lose money.

And the picture gets even worse. It's hard to reverse course from a day when the Dow is down at all, down by anything, down by next to nothing. There have been only 14 days so far this year that the Dow has rallied 90 or more points from its low of the day to the close. I can't make this any more clear: These numbers don't lie! The percentages are just so against you that you can't bet on a quick turn in the market. Take off your rally cap, guys, and stop hoping, because hope is not part of the equation.

Leave it at the stadium or your house of worship of choice.

But Cramer's not gonna leave you with that weak takeaway. So intraday rallies are rare. That doesn't mean we can't call them; we just need to know what to look for.

So now that I've totally broken you of any irrational hope for an intraday rally, I'm gonna tell you the rational, smart, empirical way you can predict a

real

rally.

First, you need an oversold market, and to figure out if we're oversold, you need an oscillator. Now there's some genuine Wall Street gibberish, but I'll translate: An oscillator measures the pressure that buyers and sellers put on the market. Simple, right? When the number gets negative -- say -4 or below -- that means there are a lot more people wanting to sell than buy. That's an oversold market, and you need at least a -4 there for an intraday rally to happen. There are a lot of oscillators out there; I prefer to watch

Helene Meisler's tracking and analysis. When you get that low oscillator number, -4 or below, that's when the sellers will tend to subside and the buyers will take control.

The second condition for an intraday rally: very few bulls. We've got this now. The

Investor's Intelligence

survey comes out every week and tells you who's bullish and who's bearish among the newsletter writers. When we're at 40% or less with the bulls, where we are now, down from the mid- to high 40s, that's more tinder for a rally because you've run out of swing-bulls -- that is, bulls who move into the bear camp, sell stocks and drive them down. Instead you've got swing-bears, to use the electoral metaphor a little too much.

Third condition: Intraday rallies start late in the day. Anything that starts midday will fail because it brings out the sellers. Only the rallies that start around 2:45 p.m. ET tend to be successful, because they just blitzkrieg the sellers who don't have time to get out. But an earlier-in-the-day rally will do the Zuul thing to you again. It levitates, and then you've got a monster on your hands.

Fourth condition: Sometimes rallies can happen after the margin clerks clear out everybody who's bought stock on margin. If you buy on margin and don't have the moolah, the clerks will bloodlessly clear you out, but they don't want to hang on to the stocks, and they dump them. When the clerks are finished -- around 2 p.m. ET -- you get the rally. But margin debt needs to be dropping for this to happen, and right now margin debt is increasing dramatically, which is a very bad sign. You need the debt to fall because it shows the margin players are getting pushed out, the stocks are getting oversold and we're getting positioned for a rally.

You also can get rallies when the short-sellers cover; that is, when they buy up the stocks they've shorted to ring the register.

Just like bulls, bears can make money, but in order to book their bearish gains, they need to buy the stock they've shorted. That buying can trigger rallies when we're down big intraday. Some people think this kind of rally is bogus, but who cares, if it makes you money?

Bottom line: Luck doesn't matter. Don't break out the kazoos and the drumsticks and the lucky hats to try to get the rally going. Intraday rallies are rare. Even if you get going from a standing start like we kind of did Wednesday, the market still can end up taking a huge beating by the close. Sometimes you can make your own luck, but not when it comes to a rally.

Remember: You still can spot a rally. Watch the oscillators go below -4, watch the percentage of bulls in the market hit 40% or less, wait for rallies that start after 2:45 p.m. ET, watch for margin debt going down instead of up, and finally, if the day is really bad, maybe you can catch a rally off the shorts buying stock to ring the register en masse and driving up the market.

At time of publication, Cramer was long TheStreet.com.

Jim Cramer is a director and co-founder of TheStreet.com. He contributes daily market commentary for TheStreet.com's sites and serves as an adviser to the company's CEO. Outside contributing columnists for TheStreet.com and RealMoney.com, including Cramer, may, from time to time, write about stocks in which they have a position. In such cases, appropriate disclosure is made. To see his personal portfolio and find out what trades Cramer will make before he makes them, sign up for

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