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Cree Charts: Identify the Swing Points

With Cree, you want to find lower-risk entry points to buy into this stock.

By L.A. Little of tatoday.com, author of Trade Like the Little Guy.

Cree

(CREE) - Get Report

is a mid-cap concern that makes light-emitting diode products, silicon carbide and gallium nitride material products, and power and radio frequency products. These products have found huge market success and the result has been to push Cree toward its all-time highs.

If you have missed getting on board this juggernaut, don't fret as there are still more opportunities to come. You just have to identify the swing points and how the stock trades at them. That's where the entry points set up for an astute trader and with Cree you do want to find lower-risk entry points to get on board.

Although the long-term chart shows a

confirmed bullish

break higher over the 2004 swing point of $42.44, we'll dive right into the intermediate- and short-term time frames. Our focus is to examine swing points and the behavior surrounding them so that you can better identify future entry points in Cree and other similar setups.

Let's start with the intermediate term.

There is actually a bit of a story that unfolds in this chart so let's work through each of the items.

Starting at the left hand side of the chart, the first thing we see is a huge volume spike higher in late May. The very next day prices push above the high of the spike day then close under it. That makes the swing point bar the smaller volume day that follows the spike.

The fact that prices went over and then closed under the previous day on less volume usually sets up some sort of retrace lower. That is what unfolded and over the next month prices moved back down to test the lows of the large volume spike day.

The test that occurred in early July was a success. In this case, a success was a retrace to the breakout bar's low and for volume to come in lighter; that is what happened.

The result of the successful test was a subsequent push back to the swing point high where volume expanded. In early July, that high was pierced. Now, if you look closely, the next two bars (the end of July and the first week of August) didn't see sufficient volume to move prices even higher. It wasn't until the second week of August that volume came in and Cree cleared those levels and never looked back.

Again, the next swing high in late August saw the same behavior -- a pullback and retest of the new floor that had been built in late July. That was a successful test as well and the result was a push back to higher highs as another explosion in volume boosted shares the first half of October.

The point of walking through the chart somewhat methodically is to highlight the stair-stepped approach that Cree has taken to move higher and higher. It is a slow push forward that is built one floor at a time.

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Here's another view that shows these conceptual floors that I see.

On the short-term time frame, you can see the same sort of behavior.

Additionally, on this time frame an excellent example of a failure that is resolved successfully is viewable. That successful test allows Cree to regenerate and move higher.

Again, starting at the left most side of the chart, observe the high volume spike in October. That spike held as the high (subsequent days didn't trade higher) and thus, in November when prices broke above that swing point, they were destined to fail. Why? The answer is because volume was lacking to confirm the break. The failure would thus require a retest.

After five or six days, prices did retreat right back into that failed break of the swing area and retested it with even lighter volume. That was the sign that the breakout was confirmed. That is what a retest confirmation looks like and what it usually leads to is a regeneration of the stock.

Such action is bullish because it provides buyers with confidence that the move higher still had legs. In December, prices broke higher once more and began building an even higher floor on the short-term time frame.

As a recap, the lessons displayed in these charts center around the notion that swing points are where you learn about the market. It is at the swing point that the market tells us what it wants to do. It either confirms the move or questions it. It is up to us to recognize what it is saying, and to listen.

Cree is currently saying that there's no reason to doubt the move at this time.

So until next time, keep trading the charts!

At the time of publication, Little was long Cree

.

L.A. Little is an author, professional trader and money manager who writes daily on

tatoday.com

, a free educational site for traders and investors. He has been featured in Stocks & Commodities magazine and is the author of

Trade Like The Little Guy

.