Apple Inc () has been a darling, dream stock for 2007, appreciating from roughly $80 per share to a peak of $200â€¦ before plummeting precipitously recently to start off 2008.
Let’s take a look at the widely unexpected carnage Apple investors have had to endure recently:
Let me explain all the annotations I have made.
- The blue ovals. This was indicative of a dislocation in the market in early November. Typically, stocks do not just plunge off a cliff unless an unexpected news report or lawsuit emerges that was completely unexpected. Often, precipitous declines are forecast through some sort of volume or momentum divergence. Both occurred, but what was key was the massive selling that occurred that slammed price from $190 down to $150 in four days. This was a sign of trouble to come.
- Investors, and TV News personalities, declared this to be an extremely profitable opportunity to pick up Apple shares cheaply. They were rightâ€¦ for a time. Price floated higher with the ominous dread that something was amiss.
- Notice the volume divergence. As price floated cautiously higher, fewer and fewer buyers were taking part. It was almost as if a distribution was taking place.
- Notice the momentum swing divergence (between price and the oscillator). The divergence was a further warning that the bulls were losing momentum, and when combined with the volume divergence and the price shock of November, odds favored downside momentumâ€¦ but we never know how far a move will carry.
- Finally, the momentum divergence, volume divergence, and spike downthrust were resolved violently with an almost unimpeded price plunge from $200 down to $130.
- Price has formed a new momentum low and the moving averages are rushing to catch up with the horrendous negative price action.
- Google ( ) is showing a similar pattern, as money is rotating out of the technology sector into more defensive ones, perhaps as big money forecasts more difficult times ahead for the market.
Here is a weekly chart of Apple to put the recent move into perspective:
You can feel the volume and momentum divergence more clearly on this weekly chart. Notice the radical signal that preceded the fall.
Investors, try not to blind yourself to the possibilities of ’surprise’ price declines in the most darling stocks, and just because a stock is mentioned 100 times per day on the news or in the blog world doesn’t mean that bad things can’t happen to that special stock. Often times, stocks will warn you through patterns, and the patterns are nothing more than the informed money exiting or distributing their positions to the relatively uninformed speculators or new investors. Big money often leaves a trail, but they frequently try to disguise their actions.
Do be careful.