There is nothing I love more than buying great stocks with great fundamentals and great technicals, in bull markets. These stocks with great fundamentals and technicals always offer rewards far beyond the returns you can get with the stodgy old names that everyone is familiar with. Cree Inc. (NASDAQ:CREE) was one of the many leaders in the past bull run we had that produced huge gains to the upside which eventually caused everyone to fall in love with it, particularly recently. From March 18, 2009 when the stock broke out on volume above the 50 and 200 day moving average to the top on April 15, 2010, Cree Inc. produced a solid 238% gain.
However, since then, the market has changed. We have gone from being in an uptrend with strong accumulation to being in a downtrend with strong distribution. Many leading stocks during that time have already put in clear topping patterns (Priceline (NASDAQ:PCLN), Google (NASDAQ:GOOG), Green Mountain Coffee Roasters (NASDAQ:GMCR)), others are beginning to rollover (Amazon (NASDAQ:AMZN), Apple (NASDAQ:AAPL), Baidu (NASDAQ:BIDU)), and yet still some are holding up defying gravity (Netflix (NASDAQ:NFLX), Salesforce.com (NYSE:CRM), VMware (NYSE:VMW)). Now, people can argue this market is just pulling back and will continue higher, and while they could be correct, 130 years of stock market facts/history suggest that the talking heads are wrong and indeed stocks are headed for a fall.
Some will say that the EPS/sales numbers and growth rates are great and the outlook is very bright. I will remind you that the same thing was said in 2000 and 2007 also. I do not trade based off of my opinions. I buy stocks based on a company's fundamentals and charts. When it comes to selling, on the other hand, 130 years of how the greatest stocks make their biggest runs and then top has proven to me the only way to know when to sell is by looking at the technicals. I remind you, this is not my opinion. This is history/facts.
After making my case on why I believe Apple is topping, I will make my case now on why it appears Cree Inc. is doing the same thing.
The market is selling off on strong volume, leaders are breaking down, and stocks that are "cheap" just keep getting cheaper. This is not bullish, no matter what people say. Until the market can produce meaningful gains on heavy volume and not weak volume, like the recent rally attempts have all been, then the right side of the market is the short side. Being long is more fun but being long and wrong in a downtrend is not. As long as the market fails at resistance, the moving averages are trending down, and the volume is heavy to the downside (indicating that institutional money managers are selling stocks), knowing that the trend is my friend I will remain looking to short rallies.
After putting in a very large uninterrupted rally from the 2009 lows to the climactic (near parabolic) 2010 top, the character of the buying and selling has completely changed. CREE topped out in April and then started a selloff on the heaviest volume since September. That heavy selling, coinciding with the declining market, continued right through the 50 day moving average. A weak rally attempt was quickly sent back below the 50 day moving average and as the stock continued to decline volume continued to pick up on the downside. Sorry bulls, this is not bullish.
What I am now looking for, unless we get a powerful follow-through day in the stock market on extremely strong accumulation, is for CREE to back and fill between the 50 and 200 day moving average that will eventually lead to hopefully a failure at the 50 day moving average that is followed by a breakdown below the 200 day moving average on strong volume. If I get this setup I will definitely be going short CREE while everyone "believes" they are getting a bargain.
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Disclosure: No positions