As investors shy away from the technology sector for fear that parts of it are overvalued, Jim Cramer wanted to make the case for three cloud stocks that he believes have more room to run.
"In the last few weeks, stocks of cloud kingpins like Salesforce.com, Workday [and] Red Hat have all pulled back from their highs," the "Mad Money" host said. "The problem with the cloud is very simple: a lot of investors don't understand it because it's fundamentally about the enterprise, companies, not about the consumer, you."
Cramer argued that because most people do not interact with the work these companies do on a daily basis, they tend to mistrust their success. In reality, these giants help even bigger names like Amazon and Netflix save fortunes on hardware, cut overhead and streamline operations.
But rather than explaining these cloud players' fundamentals, Cramer turned to the charts of technician Bob Lang, the founder of ExplosiveOptions.net and Cramer's colleague at TheStreet.com who helps run its Trifecta Stocks newsletter.
"While Salesforce, Workday and Red Hat have all had a very strong year, in the last five-odd weeks they've been hit with a wave of selling," Cramer said. "However, they're now beginning to bounce back, and Lang believes that all three could be ready to resume their runs higher after some modest pullbacks."
The "Mad Money" host started with the daily chart of one of his long-time favorites, Salesforce.
After a healthy run earlier this year, shares of Salesforce took a hit in June, falling 8 percent before finding a floor of support at the stock's 50-day moving average, a technical indicator that smooths out a stock's random price fluctuations over a given time.
Salesforce's stock is still up nearly 30 percent year to date despite the pullback, and Lang noticed that the moving average convergence/divergence, or MACD, indicator, which helps technicians predict when a stock could change direction, made a bullish crossover.
That crossover, shown above by the black line crossing over the red line, is one of the most reliable "buy" signals in all of technical analysis, Cramer said.
Since Salesforce has shown signs of recovery since its pullback, including a bottoming "W" pattern that suggests the stock could go higher from here, Lang felt strongly about its trajectory.
"If Salesforce.com can rally less than two bucks from here to $90, then the W will have been confirmed, and from that level, Lang believes it could be an easy run to the mid-$90s or even past $100," Cramer said. "In short, Salesforce's chart has a lot going for it. It's Lang's favorite name in the group."
Shares of Workday, a cloud-based software provider that helps companies become more efficient by automating back-office functions like billing and expense tracking, also pulled back considerably in June.
While indicators show that buying has slowed for the stock, Lang's daily chart for Workday showed that the stock's June decline went hand-in-hand with a decline in trading volume.
Lower volume indicates there were not many sellers, and if big institutions cannot bring themselves to sell Workday's stock when it is weak, Cramer said it could be stronger than it seems.
"Now, Lang believes that Workday is getting ready to make a run for its old highs. If the stock can climb less than a buck, climbing back over $100, then Lang thinks it could be smooth sailing to $105 in the not-too-distant future," Cramer said.
Finally, Cramer turned to the daily chart of another one of his favorites, open-source software company Red Hat.
After Red Hat reported a much better-than-expected quarter and sprung to all-time highs in June, the stock tapered slightly and sold off some of its gains, a typical post-earnings pattern for the cloud provider.
Like Workday, the pullback happened on low volume, and Lang noticed the MACD indicator approaching the same kind of bullish crossover it made in Salesforce's chart.
"Plus, the upward slope of the Relative Strength Index, the RSI, an important momentum indicator, is very steep, which Lang tells us means this can continue to perform much better than the rest of the market," Cramer said. "Put it all together, and Lang says that Red Hat really just needs to rally less than three dollars from here, to $100, at which point he expects the stock to roar higher before temporarily running out of steam at the $110 area."
All in all, as much of the market shirks the cloud stocks due to concerns about how they are really performing, Lang's indicators show that in reality, they may just be getting started.
"Here's the bottom line: the cloud companies have some of the best growth rates around, and their charts, as interpreted by Bob Lang, suggest that stocks like Salesforce, Workday and Red Hat could be ready to roar once again after a nice pullback just last month," Cramer said.
Watch the full segment here: