A Quick Look at AAPL

Mar 11, 2008: 11:25 AM CST

Apple (AAPL) has fallen from $200 per share to $115 in two months – a mammoth drop for such a strong, newsworthy stock. Let’s look at the charts to see what might be ahead next.

applemar11.png

Notice in early November 2007 how the large volatility price move sent shockwaves through the stock, and led to a ‘driving on fumes’ rally that set up a key momentum divergence as price gently made two new higher highs.

The large downthrust sent shockwaves that that led to aggressive distribution (by the insiders) into the hands of the public, who were buying for a variety of reasons, including,

“The price just made a new high and will keep going,”

“The iPhone will be wonderful”

“It’s Christmas, and everyone will be getting an iPod, iPhone or new Mac this year”

“I just don’t see how Apple stock could decline that far”

… along with other valid reasons such as fundamentals, earnings, etc. Nevertheless, these reasons – while valid – did not play out, or the demand created by these rationales did not overcome the supply or the larger tide of the market shifting into a downtrend.

I highlighted a key area on the chart that was the “Last Stand” for the bulls, which I marked with the Red Arrow in early 2008 when price fell beneath the key 50 and 20 period moving averages and rallied back to test these levels, but failed at the dual crossover zone, which created a massive resistance area. The large volatility move down (massive price rejection on higher volume) was the absolute final signal of any potential strength that was left in this stock.

This was a key signal for all longs to bail (a few skilled ones did) and for savvy traders to ‘get short.’ The price then cascaded lower and the price has not taken part in the broad market rally following the massive January 22nd market lows.

Price does appear to be forming a consolidation pattern that would resemble a type of ‘saucer’ or ‘rounded bottom’ type pattern (which may eventually form into a cup with handle).

A positive momentum divergence is developing, but always be very careful about gleaning insights from any momentum oscillator during a period of market contraction or consolidation. Remember that the market (price) alternates between range expansion and range contraction, and so it would make sense that following a massive period of price expansion (from $200 down to $115), then the market (price) would consolidate for roughly an equal period of time, so to allow traders to ‘digest’ these new price levels. Price may have found ‘value’ at these levels and needs to rest here for a pause.

There really isn’t a major reason to buy Apple stock from a technical (chart) perspective at the moment, but the bullish case may be gaining strength over the bears as price continues to diverge and consolidate. A clean buy signal could come when price penetrates the falling 20 period moving average (for an aggressive buy) or makes a higher high and higher low (for a conservative buy).

Nevertheless, the lesson Apple teaches newer traders is that price can fall harder, faster, and lower than expected – and no stock (not even wonderful Apple) is immune from shocking the masses and going lower despite cries from traders that “It just can’t get any lower!” It always can!

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How Did Oil Get to $108 per Barrel?

Mar 10, 2008: 8:22 PM CST

Let’s start by looking at the charts of this parabolic rise of this critical commodity:

Daily View:

Weekly View:

Monthly View:

Can you remember how, less than 10 years ago, the price of one barrel of oil cost less than $15? Gas prices in the US cost less than $1.00 per gallon about that time. Filling up most cars cost less than $20. Now, you’re lucky to fill-up most cars for less than $50 at the pump.

But is this a fundamentally driven rise, or a speculator driven one? In other words, is there a real reason for this climb, or is it just because traders are betting that it goes higher, and taking positions expecting to profit in the short-term?

According to a February 2008 Explorer article from the American Association of Petroleum Geologists, oil prices are likely to go higher.

Paul Roberts, author of the prescient book The End of Oil, “Clearly, there’s more than just the fundamentals at play – the Saudis and OPEC have been pointing the finger at speculators, and there’s some truth to that.”

But speculators aren’t solely to blame. Why?

“If it were strictly speculator-driven, some speculators would start making money by taking a short position,” essentially betting that oil prices would have to fall

Production declines have been quicker and steeper than expected, while new production from newly developed areas (like Kazakhstan) have disappointed, Roberts added.

However, “on the demand side of the equation, there’s no uncertainty. It’s just rising steadily.”

“The resulting imbalance, with producers straining to meet increased global demand, has led to soaring oil prices and [angry] consumers.”

Other factors beyond supply-demand (and speculation) do influence crude prices.

“The most obvious is the sagging dollar,” Roberts wrote. “Because oil is priced in dollars, and because the dollar has fallen nearly a third against major developed-country currencies since 2002, Americans are spending more for a barrel of oil.”

However, there’s no guarantee of higher prices, argues writer Ed Crooks. “”Recession in the world’s biggest oil consumer (the United States, which consumes almost one quarter of the world’s oil) plus a slowdown in the world’s strongest-growing oil market do not sound like a prescription for high oil price,” he observed.

While futures traders can take advantage of this almost stratospheric trend, consumers do not benefit from higher oil prices, which serve as a tax on drivers and companies. Higher oil/gasoline prices certainly do not help ease the pressures of a possible US recession.

In the meantime, should oil prices stay at, or increase beyond this level, there may be further economical repercussions that affect your personal pocket book that cause you to cut back on other expenses, which again would be a bad omen for the broad economy.

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Brief Weekly Index Overview

Mar 10, 2008: 10:21 AM CST

Let’s peek at some of the major Indexes to see what may be the next play in the upcoming weeks:

First, the Dow Jones:

Notice that the Broadening Top formation (bearish) that I mentioned months ago is completing to the downside.

Momentum keeps making lower lows, signaling the increased probability of lower index prices are yet to come.

A test of the 200 period moving average at 11,500 (red arrow) seems to be a near certainty (which is only 250 points away). The index may get a potential upswing (counter-swing) bounce at this level. This would cause a subsequent test of the January lows (when the market had the stellar recovery of January 22nd).

The most recent upswing (counter-swing) was not confirmed by volume (volume declined as price moved higher – blue line on volume). The recent downswing seems to be picking up more volume, further confirming the downtrend in place.

The moving averages have crossed, and price has found resistance (in the form of a long upper shadow) at that junction.

Now, let’s view the NASDAQ:

The long-term trend channel up was violated strongly with a large volatility move out of the channel, signaling a potential early trend reversal was at hand. This break was confirmed by higher volume.

Price surged down without stopping until it reached the 200 period moving average, which served as a key support level. That support level was broken with a close beneath it last week on (relatively) higher volume, further confirming the break.

Price made a new momentum low, signaling lower prices are likely yet to come.

One key note to remember is that the NASDAQ frequently leads the Dow Jones (and S&P 500) up and down. From a technical (and price performance) perspective, the NASDAQ had fared worse than the Dow and S&P, and this is a generally bearish sign for the major indexes, which signals that the big funds are worried about lower prices and are taking action.

For those who love going short, there are choice opportunities, but for newer traders, please trade with caution in this difficult market period we are experiencing currently. If you have been experiencing frequent losses, take a step back and preserve your capital, rather than trying to trade more aggressively and win back those losses. Bear markets can be more difficult to trade than bull markets.

Visit INO.com TV for access to a plethora of educational video seminars to help you during this time, or for deeper education, check out a membership to Market Club.com, which provides far more tools including scanning, daily news, “trade school” education, daily market videos/commentary, and trading signals.

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Global Market Returns to Date

Mar 9, 2008: 4:06 PM CST

The global equity return for 2008 so far is quite bleak. Let’s look at this chart to see some of the major financial markets’ rate of return since January:

Global markets are correlated, and global equities are enduring a correction that is taking them near bear market territory (generally a decline of 20% or more).

Keep in mind that most markets made their peak in October or November of 2007, and technically some have declined beyond the 20% threshold for a bear market.

What two major markets have declined the least?

Brazil (at -3%) and China (at -4%), neither of which are shown on this chart.

Global markets haven’t been entirely safe from diversification away from the United States. If we are entering into a global bear market, genuine caution must be used.

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When to Adjust Position Size

Mar 8, 2008: 11:07 AM CST

In my previous post entitled “Gambler’s Fallacy” I mentioned that you should not radically alter your position size (or trading frequency) based on the outcome of the last handful of trades. But when is it appropriate to adjust your position size?

Recall that the Gambler’s Fallacy occurs based on emotions, whether positive or negative. If your last few trades have been winners, and you’re newer to trading, this can lead to a sense of invulnerability, which can lead you to double (or triple) your normal size, and in doing so, you expose yourself to heightened emotional stress, and if the trade turns out to be a loser, you may hold on longer or behave differently, creating a larger than expected loss.

The key to creating the Gambler’s Fallacy is your faulty assumptions based on the most recent outcomes, rather than having a specific plan to change trading frequency or position sizing.

When might it be appropriate to change?

That depends on you and your selected strategy which you have predetermined either through experience or research.

Typically, a trader should change tactics whenever he or she perceives that the broad market, or the trading environment has changed. The market alternates between bull and bear, range and expansion, dull and volatile, fast and slow. You should have predetermined rules for analyzing the quality (or condition) of the market you’re trading so you can make clear distinctions and try to set up a framework of the current conditions and what may be coming next – and thus adjust your strategy.

In a raging bull market, increase your position size to the long (buy) side, because odds favor higher prices and positive resolution of trade set-ups (or stock selection). “A rising tide lifts all boats,” and you also want to “make hay while the sun still shines.” You may either choose to decrease trading activity because you want to hold positions longer, instead of trading in and out of them daily.

During a dull, flat, lifeless consolidation phase, you may want to increase your trading frequency on a reduced position size to take advantage of rangebound market swings (or you may wish to decrease your frequency and take a break from trading during this difficult period).

Also, your particular strategy will likely experience changes in the edge or expectancy during different conditions. As I’ve mentioned previously, the classic “Gap Fade” strategy performed wonderfully in January 2008, but decreased edge in February. Trader Eyal in a recent post also mentioned this phenomenon and described it well (including the shock that accompanies it) in his post “The Anatomy of Re-learning How to Trade.”

It is best to decrease trading size when your strategy shifts out of favor (or experiences reduced edge) in the Market. Educator Bo Yoder refers to this as the “Pay-out, Pay-back” cycle and notes that a major component of long-term success as a trader is knowing when your specific strategy is coming into a ‘pay-out’ cycle where it is aligned with the market (in which you increase trading frequency and/or size) or a ‘pay-back’ cycle, where your strategy has fallen temporarily out of favor, and you should decrease size and frequency or maybe take a break until you are sure (or assume) that your strategy has once again come back into favor.

Nevertheless, professional traders do increase or decrease both position size and trading frequency, but they do so based on a specific set of rules or variables that they identify, and they do so based on rules, rather than emotions. They certainly do not stress because their last handful of trades have been losers, or double-up because they have experienced a few wins.

Professionals deliberately adjust based on factors far beyond their emotions, while newer traders adjust almost exclusively based on their emotions. This is one of the key differences between creating the Gambler’s Fallacy or trading in line with market analysis according to a predetermined plan.

(Thanks to Tyro Trader for the inspiration for this post)

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