Search Jim Cramer's "Mad Money" trading recommendations using our exclusive "Mad Money" Stock Screener.
This program last aired Dec. 28, 2015.
In a special episode of Mad Money, 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) 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 Apple's (AAPL) 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.