Cramer: Charts suggest S&P 500 could make new all-time highs by the end of earnings season

With the regular market nearing the all-time highs it reached in January, CNBC’s Jim Cramer recollects investors are starting to wonder if these levels are sustainable.

“Will it be gloss over sailing? Or is it time to be afraid because we could be in for another February-style swoon?” the “Mad Wherewithal” host asked on Tuesday.

To answer these questions, Cramer procured the help of technician Mark Sebastian, the founder of OptionPit.com, Cramer’s mate at RealMoney.com and “Mad Money’s” resident expert on market volatility.

Specifically, Sebastian zero ins on reading the CBOE Volatility Index, more commonly known as the VIX or the “respect gauge.” The VIX tracks monthly S&P 500 options to measure implied volatility, or the amount of uncertainty in the judge and direction of changes in a market. Volatility is typically measured by the deviation of proceeds.

Sebastian started by looking at the daily charts of the S&P 500 and the VIX year-to-date. In a well market, these two indices should move in opposite directions; when the S&P musters, the VIX should fall as investors’ fears abate.

In January, the indices were career in a troubling pattern. As the S&P climbed, so did the VIX, which eventually caused the S&P to tank in at daybreak February and bring about a market-wide sell-off.

But right now, things look healthier than they did at the start of the year. Sebastian noted that since June 27, the S&P has climbed about 5 percent and the VIX has fallen from 18 to 12.

“Sebastian says that’s a least bullish sign,” Cramer said. “Unlike in January when the Stock Exchange was getting nervous about the rally even as stocks kept climbing, wholesalers are not racing to buy put options to protect themselves against wild swings here. Solely the opposite — they’re expecting a lot less volatility, not more volatility.”

“In other accounts, this chart tells Sebastian that the smart money put ones trust ins in this rally,” he continued.

Sebastian’s only caveat was that the abandon in the VIX was a little odd. Things tend to get more volatile in the heart of earnings age, so the decline was unusual, though not necessarily concerning, the technician said.

“On the covering, Sebastian thinks this is a pretty positive development,” Cramer augmented.

To find out what’s going on beneath the surface, Sebastian inspected the designs of the VIX and the VIX’s own Volatility Index, known as the VVIX.

He noted that the VVIX is hinder steady near the 100 level, a sign that VIX traders are stationary a bit wary about playing the index. But if the VIX dips below 12 and the VVIX forsakes to decline with it, that would be a bad sign because it would portend volatility was about to go back up, Sebastian said.

“In short, if the VIX keeps affluent lower but the VVIX doesn’t come down with it, Sebastian thinks you should conjecture some choppiness in the stock market,” Cramer said. “Although, to be entirely clear, it hasn’t happened yet, it’s just something he wants to look out for. At the twinkling of an eye, both the volatility index and the VVIX are painting a positive picture.”

All in all, while February was if the truth be known a painful month for the stock market, Cramer and Sebastian agreed that so far, the exchange doesn’t seem to be following the same troublesome trend.

“The charts, as explained by Mark Sebastian, suggest that, unlike what happened in January, the S&P 500 is front still higher — he thinks we could be making new all-time highs by the end of earnings enliven, and he wouldn’t be surprised if we get a second-half rally that takes the S&P to 2,900, perchance even 3,000, with some kind of positive resolution on imposts and trade,” Cramer said.

“My view? Based on what we’re hearing so far this earnings spice, I think he’s got a point, but given the recent run, I am watching the VIX like a hawk for any marks like we got going into the late January because, wow, that visor and that February bruising? We’ve got to spot that before it happens.”