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Jim Cramer's Technical Analysis Error: Mad Money Recap & Market Commentary

|Includes: Citigroup Inc. (C)

Good evening everyone.  Some nights I try to catch Jim Cramer’s Mad Money, to see what information is being disseminated by him (and to a lesser extent, CNBC) these days.  Contrary to some, who have a pure disdain for Cramer, I not only respect him but think he does usually provide quality information.  Conversely, I found that his show is more entertainment and the quality information I speak of is found predominately in his books and articles.  Most of those books and articles are full of useful tidbits of excellent information, even if you do not agree with his opinions/sentiment.  In an industry as such, you will not always see eye-to-eye but that does not mean you should completely disregard a qualified investors opinion.  On a side note, I highly recommend reading his books, especially if you are a novice investor.  Unfortunately, tonight is not a night I am going to discuss Cramer disseminating quality information.  Before I touch upon what I saw tonight on Mad Money, I will provide some brief commentary on this terrible day in the market.

Instead of seeing significant end-of-the-quarter window dressing, as many anticipated, we saw a major selloff starting with a strong gap down to open.  Concerns ranging from Europe to Spain to poor jobs reports on Friday were elevated to a panic status when the Asian markets sold off heavy overnight.  With the Asian markets once again selling off hard tonight and assuming they close down at these levels, we are likely to see more pain this week.

Technically speaking, we are oversold and due for a bounce.  However, a panic-filled sentiment can overrule technical analysis, which is why technical analysis should be used in combination with other skills.  The S&P 500 briefly broke our key support level of 1040, yet managed to close above it today.  Earlier, I was fairly optimistic of an oversold bounce to start tomorrow, but with the Asian markets down significantly once again, that will lower the odds of a bounce happening.   I am still hopeful but hope does not make money so be prepared for the worst.  As I state often, “protect your capital.”

With oil and energy taking a beating today, I am more optimistic in that sector bouncing back soon.  Energy is a sector that can lead the markets up, so I am now looking to increase my exposure to this sector over the coming days.  A hurricane could boost oil and natural gas prices, but I would not be surprised to see a little more downside to buy into beforehand.  Since I am not one for predicting, but rather following the trend, I will play it by ear as the charts and market progress intraday.  Now back to what was seen on Mad Money tonight.

Jim Cramer discussed a chart, which he claimed was turning bullish.  Later, some of my followers sent emails to me and were confused on his technical analysis.  Upon fact-checking the chart that Cramer used, it seemed his technical analysis just simply did not add up.  I wish I had a video recap to show all of you, but the best I have is to use the written recap from his main site and explain the rest from memory.  Maybe a video will surface sooner than later?  Cramer went on to explain that he received a bullish technical analysis perspective from Tim Collins, an author on his site.  What I saw next was a bit shocking to me.

First off, the chart Cramer was using seemed to be drawn on a board rather than computer-based to ensure accuracy.  That is an obvious major problem as it can easily be drawn to reach a biased/desired conclusion or simply drawn and distorted with human error.  Secondly, Cramer stated that the indicators (technical analysis) were stating that Citigroup (C) was turning bullish.  It is almost as if he deleted today’s action from the charts.  I even double-checked my chart information to verify the halted trade, which the circuit breaker caught today, was not included and skewing my data.  I found my data to be accurate and up-to-date.  Did Cramer really give a chart analysis without including today’s negative data?

Now, before I go into my own technical analysis of C, I need to make sure that you briefly realize why technical analysis is important to me and how to use it by combining it with other information.  Interpreting the strength or weakness in a chart helps me conclude what investment decision to make.  However, when an entire sector is bearish or bullish, it can easily overrule the technicals.  If one can time positive news for an individual stock or entire sector with a nice chart setup, this creates favorable odds of making a profitable trade.  If the markets do not sell off more this week, I think we should see some bullish behavior in the financials.  This is due to the FinReg bill finally being a topic we can start to put in the past and no longer speculate on.  Now that I presented a brief disclaimer, let us turn to my chart analysis.

Citigroup (C)

 

A/D line: Negative but flat.  Bearish due to being negative but flat is a necessary sign for a turnaround

ADX line: Bearish phase continues but the trend is weak.  Today was a failed attempt to turn bullish

MACD: Signaled buy in early June, which saw a small bullish move, but the ADX never confirmed the signal and the MACD instead went bearish

CMF (21): Negative since late April with little reason to believe it is turning around

OBV: Confirmed all moves in the PPS, normal, no divergences found when comparing to Cramer’s analysis.

RSI: Touched the very top of an oversold signal but this does not imply a reversal is at hand. Rather, that we are in an oversold phase, which could last one day or many more days.  Other indicators need to weigh-in on that aspect

Support:  Seems near-term support levels around both $3.60 and $3.51

Resistance:  Resistance around $4.08

Analysis:  After careful review of the technicals, I cannot say that C is ready to turn bullish.  However, since I like the financial sector to receive some type of short-term boost, due to the FinReg news, C might receive a boost alongside that.  If that happens, the bullish movement could start to improve the technicals.  At this moment though, the technicals are not encouraging.  The A/D line is very negative but at least it is relatively flat rather than further downtrending.  Today saw the MACD turn bearish and the ADX further establishing a bearish phase, albeit still a weak phase.  I do not like that at all.  Cramer pointed to the moving averages crossing and the previous bullish runs.  That is the only area which shows promise at the moment.  On the other hand, today’s action pushed the 20-day moving average further away from the 50-day moving average.  Unless we have a very strong bounce from here, those lines are not due to cross anymore and one cannot assume they will just yet (see the second chart for a closer view).  If you think that the FinReg news or general market bounce will give C enough of a boost to turn some of these indicators positive, than the momentum may continue and make Cramer look like a genius.  If you do not foresee the bounce or favorable news for C, than you simply cannot have faith that the technicals will turn bullish.  What I am saying is C may still go up, but not because of the technicals indicating it.

Chart reading, as I always say, is definitely an art rather than an exact science.  Cramer’s interpretation with what seemed to be a hand-drawn chart and no data for today’s action was terrible analysis though, especially when receiving major media coverage to millions of viewers.  I was shocked to see this today, even on CNBC, which many of you know I am not a fan of.

My point being is to be careful with the information you are told and how quickly you accept it.  Do not blindly follow someone just because it is easier to trust and hope rather than do your own due diligence to fact-check it, whether it's related to the stock market or not.  That also means I do not want you blindly following me either.  I would much rather you come to your own conclusion and agree because your research pointed you to the same conclusion.  This is an imperfect industry and we all make mistakes so blindly trusting someone is only setting you up for significant pain.  With the lifestyles we live today, I understand how hard it is to put in the time to fact-check.  However, that only makes the importance of doing your own research even more essential.

Hopefully, this information provides you with a better understanding of technical analysis.  As always, do your own homework to see if you agree and join our live stock market chat-room, if you have questions.  You can request chart analysis here as well.  See you in the morning.  Good luck out there.

Mike

At the time of publication, Kudrna had no positions in the stocks mentioned

 




Disclosure: None