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Time to Sell Qualcomm?

On Thursday the semiconductor Qualcomm, an integral part of the mobile Internet tsunami, took a beating after it delivered disappointing guidance for the second quarter in a row. Cramer told viewers the stock took a “14% beheading in a single day on Thursday and dropped even further on Friday.”

Now, QCOM’s innovative technology is essential to the smart-phone revolution and this should produce major multiyear gains in certain stocks, Qualcomm among them. But, after twice disappointing, Cramer wants investors to question whether this is a glitch, a speed bump, or did the company drive into a retaining wall and isn’t getting back in the race anytime soon? And more importantly, can the fundamentals be fixed? Is it a safe ride or is the selling going to continue?

One of Cramer’s favorite technical analysts said that the technicals are the best proxy we have for what the big institutional money managers are thinking, the big money cats who determine stock prices because they are marginal buyers. A good chartist can look at the footprints on one of these pictographs and tell you what the big money is likely to do next.

Investors can look at monthly or weekly charts to spot bottoms, but investors need to examine Qualcomm’s daily chart to get a sense of whether this is the bottom or if there are lower levels lurking. By Friday, QCOM had moved an extreme distance from its 200-day moving average, a key long-term measure trajectory. And this week's most important "Off the Charts" takeaway is when the volume begins to taper off, the price decline is usually at an end. With Qualcomm the volume peaked on Thursday, and then on Friday the stock put in a lower low on relatively lighter volume, even if it was still pretty heavy. That was the first tip-off that most of the selling was done.

Then on Monday there was a higher close, which confirmed the bottom theory that right now investors have a great opportunity to buy QCOM for a low-risk trade as the stock’s already fallen about as far it will probably go. On the other hand, if the stock were to fall below $38.50, the stock is going much lower.

Cramer told viewers that the question with Qualcomm is how much should investors like it after its terrible self-inflicted guidance wound. Ultimately he believes Qualcomm's problems will work themselves out as the recovery unfolds and smart phones continue to go from luxuries to necessities all around the world. Plus, the company has a terrific long-term story, especially as it continues to gain market share within its existing customer base and adds new customers.

Cramer said this doesn’t mean that Qualcomm is done going down, even as it has some 2010 catalysts such as share gains in Nokia, the increased adoption of 3G and 4G smartphones, new design wins, and expanding markets like netbooks, iPads and eReaders that use QCOM’s technology.

But, Cramer reminded viewers that they have to know how Wall Street works to believe how a company can have this kind of decline despite the positives. If you tell a good story one day and then disappoint the next, something that we have seen recently with Tessera Technologies , which dropped 10 points from $27 for doing the same, Wall Street metes out the most severe punishment possible.

The bottom line: Qualcomm is guilty before its proven innocent, Cramer said. On Wall Street that means investors need not one but two quarters before anyone can ever “fall in love with Qualcomm again.”

Cramer's charitable trust owns Qualcomm.

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