Cree Beats on Earnings, but Slumps Anyway

Semiconductor stock Cree Inc. (CREE) beat earnings estimates on Tues., Aug. 20 but the stock gapped below its 200-day simple moving average at $54.27 and traded around its semiannual pivot at $48.64 on Wednesday and Thursday. As a result, the weekly chart will end this week negative.

Cree closed Thursday at $47.80 up 11.7% year-to-date and in bull market territory 41.8% above its Oct. 11 low of $33.72. The stock is also in bear market territory 30.9% below its 2019 high of $69.21 set on April 24.

The LED and semiconductor company beat on its fourth-quarter results, but it offered weak forward guidance. They are cautious due to the Huawei ban and weak demand for LED lighting. JMP Securities downgraded the stock to “market perform” on Wednesday citing that soft demand will last longer than expected.

Courtesy of MetaStock Xenith

The daily chart for Cree shows the stock above a “golden cross” since Jan. 18 when the 50-day simple moving average rose above the 200-day simple moving average to indicate that higher prices would follow. This signal from $48.41 tracked the stock to its April 24 high of $69.21. Since then, negative reactions to earnings on May 1 and Aug. 20 led to downside volatility. The close of $56.18 on June 28 was an important input to my proprietary analytics. As a result, there is a semiannual pivot at $48.64 and a quarterly risky level at $63.67.

The Weekly Chart for Cree

Courtesy of MetaStock Xenith

The weekly chart for Cree is negative with the stock below its five-week modified moving average of $56.88. The stock is well above its 200-week simple moving average or “reversion to the mean” at $35.74. The “reversion to the mean” was last tested as a buying opportunity during the week of Oct. 27, 2017 when the average was $32.44. The 12x3x3 weekly slow stochastic reading is projected to end this week falling to 40.47 down from 45.67 on Aug. 16. When the stock was trading at its April 24 high of $69.21 this reading was 93.35 above the 90.00 threshold as the stock became an “inflating parabolic bubble.” This correctly called the bear market decline of 30.9%.

Trading Strategy: Buy weakness to the 200-week simple moving average at $35.74 and reduce holdings on strength to the 200-day simple moving average at $54.27. Its semiannual pivot at $48.64 should remain a magnet.

How to use my value levels and risky levels:

Value levels and risky levels are based upon the last nine weekly, monthly, quarterly, semiannual and annual closes. The first set of levels was based upon the closes on Dec. 31. The original annual level remains in play. The weekly level changes each week. The monthly level was changed at the end of each month, the latest on July 31. The quarterly level was changed at the end of June. My theory is that nine years of volatility between closes are enough to assume that all possible bullish or bearish events for the stock are factored in. To capture share price volatility investors should buy on weakness to a value level and reduce holdings on strength to a risky level. A pivot is a value level or risky level that was violated within its time horizon. Pivots act as magnets that have a high probability of being tested again before its time horizon expires.

How to use 12x3x3 Weekly Slow Stochastic Readings:

My choice of using 12x3x3 weekly slow stochastic readings was based upon back-testing many methods of reading share-price momentum with the objective of finding the combination that resulted in the fewest false signals. I did this following the stock market crash of 1987, so I have been happy with the results for more than 30 years. The stochastic reading covers the last 12 weeks of highs, lows and closes for the stock. There is a raw calculation of the differences between the highest high and lowest low versus the closes. These levels are modified to a fast reading and a slow reading and I found that the slow reading worked the best. The stochastic reading scales between 00.00 and 100.00 with readings above 80.00 considered overbought and readings below 20.00 considered oversold. Recently I noted that stocks tend to peak and decline 10% to 20% and more shortly after a reading rises above 90.00, so I call that an “inflating parabolic bubble” as a bubble always pops. I also call a reading below 10.00 as being “too cheap to ignore.”

Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.