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Potential Support Levels in CREE

CREE came out today guiding lower, sending the stock reeling to the tune of 10%. The past year has not been kind for the former high flying stock, as we've seen the name nearly cut in half.

I'm not going to tell the fundamental story of the stock, because story stocks do well as long as you have institutions behind them. When they liquidate, we get a big technical mess. But as the name pulls back further, we're coming into some potential levels in which support may come into play. Check out the weekly chart:

We can see a few technical developments, annotated on the chart:

Big Volume Distribution (1): There's no doubt about it, the big fish want out of the pond and it's being reflected in the volume. We also see that the big volume spikes tend to occur around gaps and earnings, showing that the news-based risk is driving the selling. Therefore any kind of bounce play will have the odds definitely stacked against it.

Channel Extrapolation (2): One of my favorite estimates for a pullback is to assume that the rate of change of the swing lows (slope of the lower line) is going to be pretty close to the rate of change of the swing highs (slope of the upper line). Assuming this relationship, we've got some potential support coming in at 42.40.

Fibonacci and Moving Average Confluence (3): If the name pulls back further, the $40 level could provide as support. We've got an important longer term fibonacci level as well as the 200 week moving average coming up as potential support.

Previous Resistance Becomes Support (4): $35 was a longer term resistance level, going back for several years. If the stock retests this level then we will most likely see buyers step in.

Remember: these are all levels of potential support. You don't have to knife catch here, and you can always wait for a resumption of the trend. In my opinion, getting long straight stock here is not the best idea from a risk management perspective-- that's why I like options, they give you plenty of versatility. I'd be looking at put credit ratios, or bull put spreads into this blood.

by Steven Place

Steven Place is the founder and head trader at investingwithoptions.com/