Apples And Lemons

Ahead of  my regular Sunday update I decided to put up a little exposé on one of the leading tech stocks I have my eyes on right now. Yes, you probably guessed it – it’s AAPL. Most of you  know that my short term trading mostly revolves around index futures, bonds, forex, and of course the commodities. When I spend my time on specific stock symbols then it’s usually because I consider them as possible long term trade candidates or they are reflective of major trends across the board. In this case it’s the latter, and in that context consider this post an hor d’oeuvre for today’s main course, which I present later.

Too boot let’s take stock of where we are. Apple’s troubles started on September 24th, the day after it painted its all time high of 705.07. It’s been mostly red candles ever since in the most brutal sell off Apple had to endure since the 2008 crash. Fortunately we steel rats managed to monetize the late stage of this sell off as I issued a first warning on October 21s and more importantly an emergency tweet on the 23rd as we were about to drop into the abyss. I hope you caught it – if not then please sign up to my twitter feed so you’re on point next time around.

Of course very few were interested in selling (or shorting) at that moment as shown further below, and neither are they now after we dropped more than 130 points since the top or just about 18.5%.

And why should they? After all all Apple’s long term chart shows us a decade of almost uninterrupted growth. With the exception of the 2008 correction, which more than halved its stock price, AAPL only closed below a monthly Net-Line Sell Level two times during that time.  Now whoever was buying that top would have been well advised to pull up this monthly chart as I wonder if they may perhaps have seen something else than a purported must-have symbol in one’s stock portfolio:

If you are a regular visitor of Evil Speculator then I probably do not have to point out the implications of an exponential curve in its late stages. If you aren’t then let’s just say – it’s stupid and it just can’t be sustained, no matter how popular or successful the underlying company. Case in point – the ongoing correction. What most investors have a hard time realizing is that AAPL is only tied to Apple Inc., the company headquartered in Cupertino, CA (where I used to live by the way) – it is only a representation of the company. The former is driven by people’s expectations of how the latter (i.e. Apple Inc.) will perform in the future and thus how much investors will be willing to pay for its publicly stock traded on the NASDAQ. I have seen unsuccessful companies tied to inflated stock valuations and successful ones with grossly undervalued valuations. Thus P/E readings and elaborate fundamental research on Apple Inc. mean nothing to me. The moment you mentally start separating a company from a symbol traded on some exchange is the moment you put yourself in a position of being more objective about the price you pay to buy a stock.

So let’s talk in charts, shall we? Here’s the point and figure panel which still shows us a bullish price objective of 970. However, on October 8th we triggered a high pole warning which still is in effect – call this being put on notice. Since then we have dropped into what I consider a major support cluster, one that AAPL will need to hold in order to retain its bullish price objective. If it does then this may just have been a healthy shake out. Well, that’s what I thought until I saw this:

On October 21st, as AAPL was still hugging its 100-day SMA, I took this snapshot on the left over at shortsqueeze.com – the right side is the Friday update. As you may recall I was astounded by the lack of short interest and my assessment at the time was that of high of complacency across the board. Which was a contributing reason I suggested a short entry two days later as AAPL was just about to fall off its plate.

But what’s even more astounding to me is today’s stats, which barely have changed! We are still only seeing 0.8 days to cover all short interest. Have all the shorts taken profits and are now waiting to buy the dip? I frankly doubt it as the stats looked pretty similar ahead of the plunge. Even today AAPL remains to be a top pick among the richest hedge fund managers. As I’m a bit of a contrarian myself I would probably be more conducive to taking on a long position today than on September 23rd. But the updated stats above show me that complacency still reigns very high out there. And that is a reason to remain cautious.

So is AAPL cheap at 577 or is it overpriced? WRONG QUESTION! It doesn’t matter where it’s been – what matters is where it’s going next. That is all that matters, whether you are long, short, or trapped in a position you want to get out of.

If you are still long AAPL then you probably hoping for a floor to materialize. Look at my first chart – daily support awaits near 555 in the form of the lower 100-day Bollinger. The monthly panel plus the P&F offers support at 570 at a Net-Line Sell Level (the red line – more info on my cheat sheet), just a few handles away. So it’s very much possible we are going to bounce here. But if we fail the monthly NLSL and drop through 550 then AAPL may just turn into a lemon and a retest of the 25-month SMA near 460 may be in the cards. The only other soft hurdle in between is the 25-week lower Bollinger near 540.

Long term I am getting a bit nervous about the growing sense of complacency that appears to have taken hold of Wall Street. The problem with having completely eradicated the bears over the past four years (very few of who obviously caught the sell-off they had been waiting for) is that there’s nobody left to buy back short positions during a major sell off. Which means support levels now become softer and less reliable – more volatile. Especially if shares are dominated by fund managers who move in large blocks. Sometimes technical support will hold – but if it fails there’s nothing but air below. And this does not just apply to AAPL but also GOOG or any of the other sacred cows of Wall Street. Aided by a never ending flow of QE cash they have managed to burn the shorts for years, until one day they suddenly trip and tumble as there’s nobody waiting below to soften the fall.

Bottom Line: I plan to be long near 550 (or if I see a floor in process) but willing to flip to a meaningful short position as soon as I see support levels being threatened. Long term I am not interested in holding AAPL – any long position I take on would be closed as soon as we revert to daily resistance levels.

Cheers,