Investors may want to prepare for a more challenging trading environment next year than the rally in 2021, CNBC’s Jim Cramer said Tuesday, based on technical analysis from the co-founder of DeCarley Trading Carley Garner.
“The charts, as Carley Garner explains, show that the S&P 500 could still rally some more points on the back of the Santa rally that usually takes place this time of December,” “Mad Money” said the presenter. “But as we move into 2022, she thinks you need to be a lot less complacent because this kind of power simply won’t last forever.”
The S&P 500 up 23.8% year-to-date and nearly 108% since closing the pandemic-era low of 2,237.40 on March 23, 2020. Although this is an unusual rally for Wall Street, Cramer said Garner wanted to emphasize that it was also “extremely unusual.”
“When we have a bunch of rate hikes next year, you’re going to have to train yourself to act uglier,” Cramer said.
One piece of technical data Garner is looking at is the longer-term monthly chart of the S&P 500, according to Cramer. After breaking the trendline’s ceiling resistance about a year ago, Cramer said it is now well above the trendline.
Monthly chart of E-mini S&P 500 futures (above) and Relative Strength Index (below)
Mad Money with Jim Cramer
“Historically, these types of breakouts almost always see a retest of a previously broken trendline,” says Cramer. “In other words, she expects the S&P to pull back near the trendline, which … will bring it around 4,000. People, that’s down almost 14% from this level. …If we we… close below 4,000, she thinks that will pave the way for a much larger correction.”
In Garner’s view, other worrisome signs include the Relative Strength Index momentum indicator being in overbought territory on a monthly chart basis, Cramer said. “When you look at the action over the past 20 years, this high index could open the door to some bad declines,” he said.
Cramer said Garner also sees a related story in the weekly chart of E-mini S&P 500 futures when analyzed alongside data from the Commodity Futures Trading Commission report. That contains the holdings of small traders, large speculators and trade underwriters.
Weekly chart of E-mini S&P 500 futures (top) and data from traders’ Commodity Futures Trading Commission commitment report (bottom).
Mad Money with Jim Cramer
It now shows that professional money managers are using S&P 500 net long futures to a degree not seen since October 2018, Cramer said. That was, of course, “just before a big drop that didn’t happen until Christmas Eve of the same year.”
“We saw a similar level of upside in early 2018, well before a sharp correction,” Cramer said. “When a transaction gets too crowded, you end up with no buyers and the whole thing tends to collapse under its own weight.”
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