Charts suggest the market could rally after its current ‘short-term volatility spike,’ Jim Cramer says

CNBC’s Jim Cramer said Wednesday that the market is poised to bottom and rally again by Monday, leaning on analysis from Option Pit founder and volatility expert Mark Sebastian.

“The charts as interpreted by Mark Sebastian say we’re currently in the middle of a short-term volatility spike, and once it’s over, we’re going to return to the post-March bottom environment where stocks can easily go higher,” the “Mad Money” host said.

Cramer first explained the relationship between the S&P 500 and the CBOE Volatility Index, also known as a fear gauge.

“Because the volatility index reflects fear, it’s normal for it and the S&P to move in opposite directions,” Cramer said, adding that that’s what happened Wednesday. “It’s when they move in the same direction that you have to start asking questions about the sustainability of the market’s trajectory.”

The Dow Jones Industrial Average slid 0.42% on Wednesday while the S&P 500 dropped 0.97%. The Nasdaq Composite decreased 2.22%.

At the beginning of 2022, the S&P dropped while the VIX went almost straight up, Cramer said, adding that the VIX didn’t take out its previous lows even as the S&P temporarily went higher.

“From there, the volatility index was off to the races. While the S&P did recover in the last week of January, it rolled over again in February. More importantly, from Sebastian’s perspective, is the fact that the VIX confirmed this negativity. With every new low for the S&P, the VIX went higher, just like it should,” Cramer said. 

In contrast, Sebastian noted that on March 14, the S&P edged incredibly close to its previous low from March 8, but the VIX rallied to much lower levels on the 14th than it did on the 8th, Cramer said. He added that that means investor fears were going down.

Cramer said that when examining what the charts show about the market more recently, Sebastian believes there’s “more room to run higher.” Cramer explained how the S&P 500’s and VIX’s recent movements support Sebastian’s point.

“The S&P 500’s most recent high was 4,631 back on March 29th. At the time, the VIX closed at 18.90. While the S&P failed to touch that same level at its highs on Monday, notice that the VIX hit a lower level there. … The level it hit was 18.57. In other words, the market went down, but the VIX also went down,” Cramer said.

“That means despite the action today, the fear is continuing to subside,” he added.

Sebastian believes the market will start rallying again by Monday, even though the S&P likely won’t reach incredibly high new levels, Cramer said.

“In his view, we’re in the midst of a two-to-three day VIX spike. … The kind of move that’s incredibly fast, but tends to be short-lived,” Cramer said. “He does think [the S&P] could see 4,700 again sometime, maybe potentially before Easter.”

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