Strong Education Stocks APOL and ESI Clobbered

Jan 26, 2009: 12:33 PM CST

I had mentioned earlier that we were seeing relative strength in education stocks such as the Apollo Group (APOL) and ITT Education Services (ESI), both of which made fresh 52-week highs last week.  However, Monday morning saw these stocks get clobbered in early trading.  Let’s look at them and see this development.

Apollo Group (APOL): Daily

Apollo Group APOL Daily Chart

Apollo was “riding the 20” meaning it was basically using the rising 20 day EMA as a trend channel support line until today (Monday) when the 20 was broken as we are getting a deeper retracement off a negative momentum divergence.

Price made new highs at $90 per share (not seen since 2004) and then immediately backed off that level as investors consolidated gains in what appears to be a profit-taking swing.  Volume failed to confirm the new price highs as we saw a volume divergence develop as price broke to new highs (higher prices on lower volume).  That should have tempered the bulls’ optimism.

Still, APOL has shown remarkable relative strength to the S&P 500 and many other stocks as well, but investors are letting out a bit of the steam currently.

Let’s look at ITT Education (ESI) on the weekly chart, which has a very similar structure to the APOL weekly chart, only Apollo made new highs while ESI formed a double-top.

ITT Educational Services (ESI) Weekly:

I’ve also added a bit of Elliott to this chart.  We had an “ABC” corrective wave take us down to the March 2008 lows before embarking on what appears to be a fresh five-wave impulse to the upside in both of these stocks.  If this count is correct, then we’ve finished Wave 1 up into July and then formed an ABC corrective wave down into the October lows and are now in the midsts (or peaking) in a 3rd Wave to the upside with a 4th Wave down yet to come (we are likely in that 4th Wave now) and a final 5th Up still on the horizon.

Setting the Elliott Count aside, we see that price experienced resistance at the $130 level, which was the exact high as the October 2007 peak alongside the broader equity market.  ESI bottomed in early 2008 as the market began accelerating its slide, though make no mistake that a plunge from $130 to $40 was a devastating corrective swing.  It may be amazing to investors that the stock recovered its losses this quickly (in just over a year’s time).

Price fell 70% from peak to bottom here, and then rose around 225% from the March low to the $130 peak.  This underscores a major point in investment and trading.  When your account falls 70%, you don’t need a 70% rise to get you back to break-even… you actually need a 225% rise which – under all circumstances – is extremely difficult.  This underscores why you need to guard diligently against major losses in your portfolio and use disciplined stop-loss strategies.  It’s preferable to take small hits than it is to take one catastrophic loss if you can help it.

Still, continue to watch these and other education-based stocks to see if they continue to show relative strength or if this may be an early sign of major weakness.  One would expect education-based stocks to do well in a time where so many workers are being laid off, as they perhaps return to finish degree programs or go into new fields in a competitive job market.

Corey Rosenbloom
Afraid to Trade.com

9 Comments

9 Responses to “Strong Education Stocks APOL and ESI Clobbered”

  1. Anonymous Says:

    Negative comments on the education sector in the current Barron’s.

  2. Corey Rosenbloom Says:

    Ahh.

    I was following from a technical perspective. Still, it looks to be orderly profit taking at the moment, particularly on the weekly charts. We’d have support at their rising 20 week EMAs. We were due for a correction.

  3. Andrew Stanton Says:

    Corey, looks like unfilled gaps on both sides of a double top, would you call that an island reversal in APOL?

  4. Corey Rosenbloom Says:

    Andrew,

    It would be called an island reversal indeed. That’s evidence that we might have put in a top. I keep thinking we’ll find support perhaps at the weekly EMAs but price will tell in time.

  5. Stephan Says:

    Very nice… But i still think because of the exponential move of your wave 3, that we facing an A,B,C;

  6. marketwizard Says:

    love your blog. I check your ideas quite often and find you to be a highly talented technician. I wanted to point something out in your APOL analysis. You referred to the test of the $135 highs as a “double top”. According to classic and contemporary technical analysis, the maximum distance from peak to trough cannot exceed 35%. In the most extreme case, factoring in volatility spikes, 50% could be used. Anything more and each move is an independant trend. The idea behind a “double top” is to be able to measure out a downside target. When going beyond 35%, this becomes almost impossible, especially if one is using logarithmic charting.

    Keep up the good work!

  7. nawaf Says:

    i think iii is shrtest wave when comparing it with i & v
    in adition wave i was 3 subdivide wave

  8. steoli Says:

    Well, he didn’t said that wave 3 was already completed.

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