January 24th, 2013

AAPL Update

imageA friend asked last night whether it might be time to jump on AAPL, now that it’s dropped so precipitously.  I referred him back to a piece I’d written early last November when the stock was at 563 entitled “AAPL Gets a Cold, the Market Gets …..?” in which I said that AAPL was forming a perfect head-and-shoulders top reversal pattern and, if it held to completion then the stock could fall to 385.

At the time, a call that AAPL would fall to 385 looked bold.  However, head-and-shoulder patterns are one of the most reliable chart patterns as are the mirror image of inverted head-and-shoulders as bottom reversal patterns (click on image to enlarge).

AAPL - 20130124

AAPL gapped down 61 points, or 12%.  My friend asked three questions: Why didn’t you sell short when you had confidence in the chart?  Should I sell short now?  Or should I buy now since it’s dropped so much already?  Typical questions that we ask every day about every stock currently in our Model Portfolio or stocks that we are looking to buy.

The first two question can be answered as a matter of general policy: I don’t short stocks.  I’ve tried it over the years and have lost money nearly each time.  Stocks can double if you hold them long enough in good market conditions but the odds of them falling 50% is rare.  We believe that the market controls 50% of a stocks action, industry 30% and factors specific to the individual stock only 20%.  Furthermore, based on my study of the stock market over the past 50 years, I know that the market increases 70% of the time.  So the odds are against you 70% of the time when you bet a stock will decline by selling it short.  You have to have close to 100% certainty that a stock will decline before taking on such long odds and, because I trade stocks based on my assessment of supply and demand dynamics rather than fundamentals, I never have that level of certainty.

The answer as to whether AAPL is a buy today is also rather easy and summed up in the Wall Street saying: “Never try to catch a falling knife”.  Right now, AAPL is clearly a falling knife.  Someday, somewhere, it will hit the ground; it’s just that we don’t know where.  When it does, the tide of momentum will have to reverse.  AAPL fell because almost every large institutional investor had AAPL as one of their major holdings.  There just wasn’t anyone in the market to sustain the demand and keep the price rising.  The balance of power flipped from demand-driven momentum to momentum propelled by supply.

As the chart above indicates, it took eight or nine months for momentum to turn from demand to supply; it will take an extended period of time for it to flip back from supply to demand.  Individual investors don’t have to be the first ones to climb on that train since we have no way of knowing when it will change direction.  What we do know is that there will be plenty of time for the individual investor to climb onto a moving train that has as large capitalization as AAPL.

My earlier guess was that the “roundhouse” will be in the 350-400 range.  No need to panic and buy now.

November 28th, 2012

Head-and-Shoulders Patterns: AAPL and GLD Case Studies

In my book, Run with the Herd, I retell the coin toss experiment from Burton Malkiel’s book, A Random Walk Down Wall Street.  In it, he asked students to

“continuously toss coins with heads arbitrarily representing a move up in a stock’s price and, conversely, tails a move down.  All the price changes were assumed to be of equal magnitude and all were recorded in a line chart.  After an unspecified number of tosses, the students began to see patterns in the charts that looked similar to those of stock charts.”

One of the most talked about, recognized and perhaps most reliable stock chart patterns are the head-and-shoulders and its mirror image the inverted head-and-shoulders. What makes these patterns so important is that they fall into the reversal category (as contrasted with the continuation or trending patterns).  In these patterns, the price/value of the stock, index or commodity makes three different attempts to reverse the direction of the prevailing trend.  Characteristically, the price/value reaches approximately the same level the first two times and then falters; it succeeds in the third attempt and crosses the level reached the previous two attempts. The elements of the pattern include a shorter left “shoulder”, a longer middle “head”, and a shorter right shoulder; all are connected by a trendline at what is called a “neckline”.

As you might expect, as a chartist I believe that comparison between the randomness of coin tosses and stock chart patterns is a false one using the wrong logical argument (incorrectly using deductive reasoning rather than inductive reasoning).  But it is true, however, that the head-and-shoulder chart patterns are easier to perceive in retrospect and not as readily discernable in real-time.  Furthermore, when the pattern has evolved sufficiently in order to actually intimate its future likely outline, the practical question remains as to when might be the best (highest probability of being realized with the lowest risk of being failing) time to act on that perception.  Here are two cases in point:

    • AAPL: At the beginning of the month, I wrote a piece entitled “AAPL Gets a Cold, the Market Gets …..?” when the stock was at 563 in which I included a chart showing a partially formed head-and-shoulder pattern and wrote: “Has the stock hit bottom and is it poised for a turn around (a large Wall Street firm recently called on CNBC for AAPL to more than double over the next year)?  Double it might but in the near-term it’s setting up for another 25% decline below what might be consider the neckline of an emerging head-and-shoulder topall the way down to 390 (nearly 30% from current levels).”Compare the chart in that post with the one below and you’ll find that AAPL is closely following the course outlined there:

      Although Robert Weinstein of Cramer’s theStreet.com wrote today that investors should “Put Away the Prozac, Apple’s Just Fine”, this emerging pattern continues to look to me uncannily like an emerging head-and-shoulders top [Cramer's Action Alerts Plus service has been a long-term AAPL investor with a 90+% profit].  There’s no way to tell whether the stock will follow-through but it pivots and starts declining again, I would order a refill from the pharmacy.

    • GLD: I wrote a piece at the beginning of the summer entitled “When It Comes to Technical Analysis, Accuracy Depends on Time Horizon (GLD)” in which I included a chart of GLD with a pattern that looked like a descending channel and wrote: “I look at a possible breakout from my flag and see a long-term move equal to the preceding the neckline.  I see the possibility of a 75-80% move to the 250-270 level over a year or two.  It all depends on how much time you want to spend managing your portfolio and making trading decisions.”

Today that channel has morphed into what might turn out ultimately to be an inverted head-and-shoulder pattern.  The hesitation in calling it that is that the pattern is developing after a major bull run rather than at the bottom of a major decline.  Consequently, this inverted head-and-shoulder will further morph a consolidation pattern or some type of reversal top pattern.

Bottom line, no matter how good these chart patterns may look a year from now, unless and until they cross their necklines, there’s no certainty that they won’t fail to deliver.  While getting in early will produce a greater return, the trade entails more risk that the stock moves in the opposite direction.  [In fact, even after a trendline is crossed, the stock will often reverse and test the trendline in what is called a "Buyers'/Sellers' Remorse Correction".]


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November 8th, 2012

AAPL Gets a Cold, the Market Gets …..?

I searched this blog to see what I may have written about AAPL over the years and found that there have been 15 individual posts since 2006, many comparing AAPL and GOOG (search other terms by using the search button in the lower left panel).

But situation is dramatically different today than it’s been at any previous time [haven't people gotten into a lot of trouble when they claim "this time it's different"?]:

  • Jobs is no longer the creative or leadership head of the company,
  • the company now has competition for its products (e.g., Samsung) and its services (iTunes vs. Pandora, Spotify and Amazon)
  •  the stock became the largest capitalized stock in the world and held a dominant role in all market indexes
  • the stock is considered “overbought” being a large position in nearly every mutual, pension and hedge fund,
  • finally, some blowback is now being heard and felt about the product introduction rate and design [note: the discontent with the connection format change and the mapping service disappointment].

So, I’d like to toss my stock chartist’s view of the “bear market” that has captured the AAPL driving it down 18% over the past two months.  Has the stock hit bottom and is it poised for a turn around (a large Wall Street firm recently called on CNBC for AAPL to more than double over the next year)?  Double it might but in the near-term it’s setting up for another 25% decline below what might be consider the neckline of an emerging head-and-shoulder top all the way down to 390 (nearly 30% from current levels).

Supporting this negative view is the long-term negative divergence existing between the trends between the two price peaks in 2012 and the comparable peaks in the OBV volume trend.  OBV indicates the relative volume between buyers (closes higher) and sellers (closes down).  In other words, as AAPL churned higher it was on less volume than those days when it closed lower.

Unfortunately, AAPL represents a large component of the major indexes so “when AAPL sneezes, the market gets a cold”.  Let’s hope that cold doesn’t turn into pneumonia.

July 11th, 2012

TIF and Cramer’s Luxury Retailers Call

I don’t see many clear tops these days but Cramer’s pontification this evening about difficult times for luxury goods retailers and manufacturers caused me to take a look at Tiffany’s chart.  What we may here is another case of warning of a fire long after the barn has already burned down.  What I mean is that TIF offers a textbook case of a head-and-shoulders top that could have been sold 20% higher and probably should have been sold without any question when it gapped below the neckline of that top reversal pattern at the end of May:

TIF is now 40% off its peak a year ago so Cramer should probably have spoken about where the bottom might be rather than taking a whole segment of the show to put together a rationalization for burying a whole group of stocks including COH, PVH, RL and VFC (I was fortunate he pumped TGT since it’s in my Portfolio).

According to some chart reading rules-of-thumb (i.e., neckline  is halfway between peak and trough bottom), TIF might be half way to the bottom or around 42.  These last ten points could be quick so those who play both sides of the street (short as well as long) should act quickly because the remainder of the trip could be over before you even realize it.