Cramer On Technical Analysis: Charts Are Like Footprints At A Crime Scene

The questions of if, how and why technical analysis works are hotly-contested among traders. Understandably, it may be hard to wrap your head around why patterns on a chart would dictate the price movement of shares of a billion-dollar company.

In a recent episode of "Mad Money," CNBC analyst Jim Cramer gave his take on the power of chart patterns.

“You must consider [charts] as if they are footprints at a scene of a crime. These footprints trace out what big money managers might be doing with their buying and selling of stocks,” Cramer explained.

Related Link: Some Technical Analysis Can Guide Investors On How To Approach AT&T's Pullback

The idea is that the charts aren’t influencing share prices directly — they are simply a reflection of what traders are thinking. Once you can determine what other traders are thinking, you have the opportunity to get one step ahead of their next move. Many top traders use every technical and fundamental resource at their disposal to get the full picture about what’s going on with a stock and what’s going on in the collective mind of the market.

For example, Benzinga alerted its Pro subscribers about potentially bullish technical trading activity in SemiLEDs Corporation LEDS on Tuesday when the stock leaped and then retreated on no major news. Two days later, the stock surged 150 percent and hit a new 52-week high.

Disclosure: The author holds no position in the stocks mentioned.