Shock Declines

Jul 25, 2007: 8:00 PM CST

My, how the mighty have fallen!

I admit that the following charts are not as bad as they could be, but nonetheless, many traders were trapped in these overnight blunders and are underwater with (temporarily) dashed hopes.

The reason each of these stock ‘blunders’ is remarkable is that there was great news or ‘hype’ in these stocks and newer traders don’t understand how this could have happened – how they could be facing a loss this big this quickly.

Will each of these stocks come back? Probably – eventually – but that doesn’t mean that people aren’t very upset with recent price action, especially if their ‘hopes of quick’ were dashed.

First, Apple (AAPL).  With the release of the iPhone, many people ‘bought into’ the hype in the expectation that price will rally because of stellar sales of the iPhone.  Their bet was short-lived as a report that the iPhone didn’t sell as many units as expected snapped the stock back to a fairer value (hint – this is a potential pullback buy point now):

aapl-july-25.png

The second example is Caterpillar (CAT), a stock I have posted previously with regards to its strong uptrend.  Jim Cramer frequently hypes this stock and all seemed well… until they missed earnings expectations:

cat-july-25.png

The final stock for consideration is Altheros Communications (ATHR).  I admit – I was considering  buying this stock for a quick swing play based on the uptrend, solid fundamentals, and pullback to the 20 period moving average.   Nevertheless, when a stock does violate its moving average, it typically does so with a test, not a ‘boulder drop’ like this stock.

athr-july-25.png

Sometimes, the greater the uptrend, the farther the fall.  Recall rule two of the Market Principles:  “Trend End in Euphoria” and – while I’m not suggesting any of these trends are over, I am suggesting that things happen that are out of our control or force of prediction in the market.  Technicals don’t always hold up – fundamentals don’t always either.  Sometimes, surprise things happen that few people are positioned properly (unless by sheer luck).

In fact, when a shock occurrence occurs, the impending move is exascerbated by the fact that so many people believed with all their heart that price could not go down.  They will continue to sell out their positions slowly (or rapidly, at times) until all the selling pressure has eased.  Remember, the more people that buy a stock, the more people have to sell (at some point).  Traders often take short term positions based on current beliefs/perceptions about the market that are subject to change at any moment – they adjust accordingly.

As always, be careful out there and be ready for anything!

1 Comment

One Response to “Shock Declines”

  1. John Singer Says:

    Here you can see how Jim Cramer has told his viewers of Mad Money to trade AAPL in the past year of the show – http://www.stocktagger.com/2007/06/jim-cramer-keeps-riding-apple-aapl-on.html