Analyst Larry Williams sees a bottom in the making

CNBC’s Jim Cramer on Friday explained fresh technical analysis from veteran chartist Larry Williams that signals the market is headed for a bottom.

« I know it’s tough to believe anything positive at this moment, but I said the same thing in April 2020, and that’s when Larry Williams made one of the best bottom calls I’ve ever seen, » the « Mad Money » host said, referring to when the market spiraled after the onset of the Covid pandemic sent shockwaves through the global economy.

« He says this is it. … I wouldn’t bet against him. I trust his predictions more than I despise this market, and I say that as someone who really does hate the tape, » he added.

Cramer started off his explanation of Williams’ analysis by examining the S&P 500 futures chart.

The futures line is in black and the advance/decline line, a cumulative indicator measuring the number of stocks going up on a daily basis versus the number going down, is in blue, Cramer said.

Williams views the advance/decline line as an indicator of the market’s internal strength or weakness, according to Cramer.

« Right now, you can see that while the S&P spent the last week getting smashed into oblivion, the advance/decline line has been holding up much better. In fact, it’s steadily worked its way higher, » he said.

He noted that that pattern – when an important indicator goes the opposite way of an index – is called a bullish divergence. « According to Williams, this action in the advance/decline line is incredibly positive for the market. It tells you that, from the perspective of breadth, the worst of this decline may be behind us, » Cramer said.

Next, Cramer inspected the daily S&P futures chart plotted with the on-balance volume index in purple. The chart reveals that the volume of trading has already started to « dry up on the sell side, » Cramer said.

He noted that the on-balance volume index is a cumulative indicator that measures volume flow by adding the volume on up days and subtracting on down days.

« We care about this because volume’s like a polygraph test for technicians: High volume moves are telling the truth. Low volume moves [are] often misleading, » he said.

And because the on-balance volume line has held up despite the S&P reaching new lows, the chart is consistent with what Williams would expect to see in « a down market where some major money managers have finally just started buying stocks more aggressively, » Cramer said.

He also showed a chart showing S&P 500 futures plotted with Williams’ insider activity indicator, in green.

« Look at the bottom of the chart – this is Williams’ … commitments of index traders, which shows you what professional money managers are doing with their futures positions, » Cramer said. « Even though the market’s down, Williams sees the professionals buying here, and that often sets up significant rallies, » he added.

Finally, Williams observed the dominant cycles for the S&P 500, which typically run for 75 days.

« Right now, that cycle says the S&P is ready to run … and if the cycle holds, Williams would expect it to keep running through mid-to-late June, » Cramer said.