Charts show investors shouldn’t be ‘too exuberant’ after Tuesday’s rally, Jim Cramer says

CNBC’s Jim Cramer recommended patience after Tuesday’s market bounced in anticipation that lawmakers in Washington would settle on a wide-reaching economic stimulus deal.

The “Mad Money” host took a cue from chart analysis by investment advisor Tom DeMark, the head of DeMark Analytics and creator DeMark Indicators used in timing market trends.

“The charts … suggest that the Dow and the S&P 500 came close to bottoming, but there might need to be a bit more capitulation before the decline exhausts itself,” he said. “I think he makes a great point, so don’t let today’s move make you too exuberant. We still have a lot more bad news to process.”

Cramer credited DeMark for calling bitcoin’s top and subsequent bottom in 2018, along with nailing the stock market’s bottom during the 2011 debt ceiling crisis. As investors continue to dump stocks during the coronavirus outbreak, Tuesday’s “good news” rally on an economic response package was likely fueled by short-sellers covering their positions, he said.

Though the Dow Jones Industrial Average advanced more than 11% and S&P 500 rallied more than 9% Tuesday, both stock indexes are still swimming in deep bear territory. The Dow hit an intraday low of 18,213.65 and the S&P of 2,191.86 the day prior, more than 35% off their February highs.

“Once the shorts finish covering, the demand dries up and it often leads to a sharp decline,” he added.

DeMark has a bottom target near 18,183 in the Dow and 2,097 in the S&P, basing his thesis on the 38.2% decline during the 1987 crash from peak to trough. The Dow could be close to bottoming, while the S&P may have to retest its lows, Cramer said pointing to similar market trend during steep down trend that came with the debt ceiling crisis in 2001.

“Based on the history and the current setup, DeMark’s expecting that we’ll be stuck in a trading range like 2011, [with] the averages bouncing off yesterday’s lows before retesting them down the line,” Cramer said. “You know what, I think that kind of fits, as we have at least another couple weeks of very bad news on the coronavirus front.”

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