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Charts Suggest Stocks May Fall Further Before Powerful Santa Claus Rally Kicks in, Cramer Says

Scott Mlyn | CNBC
  • There could be more near-term pain for the stock market before it reverses course and mounts a powerful year-end Santa Claus rally, CNBC's Jim Cramer said Wednesday.
  • The "Mad Money" host leaned on charts from the legendary technical analysis Larry Williams.

There could be more near-term pain for the stock market before it reverses course and mounts a year-end Santa Claus rally, CNBC's Jim Cramer said Wednesday, leaning on technical analysis from Larry Williams.

"The charts and the historical data, as interpreted by Larry Williams, suggest that we're looking at a powerful rally near the end of the month — not right now," The "Mad Money" host said. "But we might also have another leg down before this market stabilizes."

"My view? I think Larry is giving you still one more reason to start buying opportunistically on the way down," as Wall Street digests concerns related to the Covid omicron variant, Cramer added.

Williams arrived at his broad conclusion by looking at two groups of information, Cramer explained. The first deals with seasonal patterns, which Williams says supports Wall Street's belief that December is usually a strong period for stocks, especially over the back half of the month, Cramer said.

Technical analysis from Larry Williams that looks at seasonal trading patterns in December.
Mad Money with Jim Cramer
Technical analysis from Larry Williams that looks at seasonal trading patterns in December.

"If you only cared about the seasonal pattern, then you'd want to buy the [S&P 500] on Dec. 15th ... to catch the mid-to-late month move," Cramer said.

However, Williams' analysis determined it's a bit more complicated than that this year, Cramer said. The reason is that the market has poor breadth right now, based on the advance-decline line, which measures the amount of advancing stocks subtracted by the number of declining stocks.

"As far as Williams is concerned, that's very bad news because the averages tend to follow the advance-decline line. Basically, this thing already predicted the sell-off we've had so far and Williams worries that the market won't be able to bottom until this indicator turns around," Cramer said

S&P 500's advance-decline line, according to technical analysis from Larry Williams.
Mad Money with Jim Cramer
S&P 500's advance-decline line, according to technical analysis from Larry Williams.

Using historical data, Williams believes the advance-decline line will turn around near Dec. 10, clearing the way for the market overall to follow suit, Cramer said.

"In other words, this cycle forecast confirms what we already saw from the seasonal forecast: It points to a mid-to-late December Santa Claus rally, although it also suggests the next week or two could be difficult," he said.

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