Chart of the Week — Cree (CREE) – September 23, 2007
I’ve been covering Cree (CREE) for the past couple of weeks on RealMoney and at Stock Market Mentor. The stock has had a great run — for two reasons. First, it’s a great long-term story where Cree is one of the prime beneficiaries of any widespread adoption of LED technology over the traditional, energy-sucking light bulbs. But also, a rumor that General Electric (GE) was going to buy Cree has been flying around for a while — and an analyst at Zacks mentioned it again late last week.So, as you’d imagine, all the folks who are trying to make a quick buck bought Cree to get in on the action! Well, the last of those folks finally bought on Friday morning. Over at StockMarketMentor.com, we were out of the stock by Friday morning with a nice profit.
But I don’t this trade is done yet. Let’s look at the daily chart.
See how the stock ramped right off the 50-day moving average a couple of weeks ago on strong volume, paused for a few days, and then blasted through the July high of $30? Well that breakout above $30 sets the stage for a test of that level as support rather than resistance. You see, many traders will wait for a pullback to this breakout level before committing funds to the stock. There isn’t likely to be that much buying interest between $32 and $30.
I believe in the long-term prospects of Cree. I just think the stock got ahead of itself on the latest round of rumors. Will Cree eventually be bought? I don’t know. I like the company as it is now, not as a possible acquisition candidate.
So if you’re looking for a second bite at this apple, here’s how you might want to trade it. Just set a price alert on your trading software at $30.50 or so. Then, if the stock falls that low, you can start watching the stock for signs of renewed buying interest. The renewed buying interest will be quite evident because the stock price will stop falling. Pretty simple, huh?
Once you buy the stock as close to $30 as possible, then you can put a fairly tight stop just below $30. After all, if the stock ultimately falls back through support, wouldn’t you want to take a small loss and free your money up to put it to work elsewhere? You could always buy CREE back when the stock starts moving higher again.
If you have any questions about this, don’t hesitate to email me at Dan@StockMarketMentor.com.
Also, I’ll be in Newark, New Jersey this Saturday teaching a trading class. I’ve got just one more seat open; so if you’re interested, you can get more information here.
Have a great week, and don’t forget that Friday marks the end of the 3rd quarter.
Dan Fitzpatrick
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