In a special episode of Mad Money Monday, Jim Cramer dedicated the entire show to the art and science of technical analysis, picking the best charts from his weekly "Off the Charts" segment and analyzing even closer.
Why study the charts at all? Cramer said it's because charts are like the footprints at the scene of the crime, clues to what the big money managers are likely thinking. Additionally, charts have a remarkable self-fulfilling nature because so many professionals abide by them religiously.
While Cramer is still a firm believer in fundamental analysis, analyzing how a company is performing and how its sector fits into his larger world view, he said technical analysis can be a useful tool to confirm a trend or disprove a theory.
For example, if the Dow Jones Industrial Average hits a new high, then historically the Dow Transports index needs to also hit a high for the move to be sustainable. If the transports are heading higher, then the move is legitimate.
Finding a Bottom
Finding a bottom after a long decline can be incredibly lucrative, Cramer told viewers, as was the case in 2009 when he set his sights on AT&T (T - Get Report) as about the most bulletproof recommendation he could muster.
Cramer said that at the time AT&T was still hitting it out of the park with Action Alerts PLUS holding's Apple's (AAPL - Get Report) iPhone, and yielded a hefty 6.2% at the time. But to be sure, Cramer consulted with not one but four chartists.
All four technicians agreed AT&T had a climax low at $21 a share and was building a base at that level. The volume at the time indicated that the sellers had "exhausted" themselves and buyers were finally stepping up in greater numbers.
But finding a bottom is not a stock that's heading higher. For that, the technicians used a 200-day moving average, and the AT&T's cross above that average, to determine that the move was indeed for real.
Using these two reliable patterns, Cramer said he was able to capture a fabulous buying opportunity.
When's the Pullback?
The next crucial thing technicians might be able to tell you is when a stock is overbought and ripe for a pullback, Cramer told viewers. That can be determined by a stock's relative strength indicator, or RSI, which measures both the direction and velocity of a stock's move.
Technicals often like to match a stock's RSI with something else, like the RSI of its sector or a larger index. They also look historically to see if past moves in the RSI have translated into the moves they expect.
Cramer said typically when a stock gets overbought, it's ripe for a pullback. The inverse is also true.
Charts can be tricky, however, as strong moves sometimes break through traditional metrics and defy the odds for extended periods of time.
Cramer recalled how, in 2009, colleague Dan Fitzpatrick correctly identified Las Vegas Sands (LVS - Get Report) as it broke out of its $10 a share funk and soared to $48, almost in a straight line. This technical move was brought on by Sands' properties in Macau.
Alcoa's 'Head and Shoulders'
Cramer's next lesson in the technicals dealt with the dreaded "head-and-shoulders" pattern, as seen in Alcoa (AA - Get Report) back in 2010. Cramer said he ignored this reliable sell signal to his peril.
Cramer said both Europe and China had begun to slow, creating an aluminum glut for Alcoa and stunting its otherwise stellar turnaround plans. Had he adhered to his discipline, his losses could have been averted.
The opposite was true in 2013 when colleague Tim Collins told Cramer to consider Pfizer (PFE - Get Report) , which had just completed a reverse head-and-shoulders pattern, among the most bullish of patterns that technicians seek.
Sure enough, shares of Pfizer popped over 10% after Collins identified the move. That's why Cramer said patterns matter, and when investors see a reliable pattern in a chart, they should take heed.
Domino's 'Cup and Handle'
Another lesson in charting involved one of his favorite patterns, the "cup and handle." He said that when shares of Domino's Pizza (DPZ - Get Report) , which he originally recommended at $10 a share, shot up to $30 before drifting lower, he turned to colleague Ed Ponsi for help.
Ponsi did not advise selling Domino's, as Cramer expected, but suggested buying more. Why? Because the stock had just completed a cup-and-handle pattern and was ready for another leg higher.
Ponsi nailed that recommendation, Cramer recalled, and Domino's doubled from that recommendation.
Ponsi was also correct on his 2011 call on Monster Beverage (MNST - Get Report) , then called Hansen, which displayed a cup and handle. The $49 stock jumped to $79, confounding the naysayers at the time.
The fundamentals and technicals can coexist, Cramer said, and investors need to make peace with both of them.
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