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Jim Cramer's Fail-Proof Plan To Identify A Stock Ready To Explode

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Jim Cramer's Fail-Proof Plan To Identify A Stock Ready To Explode

As is often the case, a surging stock that is overbought is ripe for a pullback. But does the opposite hold true that a tumbling stock is ripe for a rebound — and if so, how can investors take advantage of this trend?

Technical analysis is key to identifying stocks poised to explode, CNBC's Jim Cramer explained during his "Mad Money" daily show on Monday.

Use The Charts

Investors can make use of the relative strength index to see if a stock is overbought or oversold, Cramer explained. The ratio is a momentum oscillator that measures the direction the stock is going and the velocity of the move versus something else, such as a broader index or an individual sector.

The volume chart is also an important indicator as many technicians dismiss a small stock move on light volume. But if a spike in volume is seen over a consistent period this may indicate big investors such as a money manager is looking to buy or sell the stock in large numbers.

"Powerful moves can, and often do, elude those who are only focused on the underlying companies and not the action of the stocks themselves," Cramer said.

However, the golden rule that nothing is set in stone always applies, Cramer emphasized. For instance, a stock can "defy the notion of the inevitable gravitational pull" and can stay overbought or oversold for weeks at a time.

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Image Credit: By Tulane Public Relations (Mad Money Uploaded by AlbertHerring) [CC BY 2.0 (http://creativecommons.org/licenses/by/2.0)], via Wikimedia Commons

 

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