Trade Apple Like a Fool

I have no position in Apple (AAPL) right now, and haven’t for a few weeks. Why, you may ask? Because the short-term trend has been indeterminate, sideways and choppy at best. Over the longer-term, the downtrend is intact, albeit in a weakened fashion. And it’s very difficult to profit in this kind of environment, so I have been recommending cash to Apple Investors and my subscribers. But the downtrend is about to resume, and it’s time to take a stand.

In a sideways and volatile market like this, individual stocks can make or break you. There’s simply too much risk for the small investor to profit from individual stocks. Look at AAPL over the past week. It’s down just 0.5% for the week, but intra-week it has moved in a range spanning over 8%! AAPL started the week with a huge gap up, a very encouraging sign, as gaps can provide good support going forward. But it didn’t hold, as AAPL erased the gap the following day. Wednesday was a day of indecision, followed by a weak attempt to regain the gap on Thursday. But then Friday revealed the true intent of the market, and that’s to resume the overall downtrend.

All the major indexes have formed a rising wedge off the November lows (Nasdaq, S&P 500, Dow, Russell, Wilshire), and last Friday they all cracked the uptrend support line late in the session. The tech-heavy Nasdaq was the lone exception, stopping right at the trend line, though it is often the leader in rallies and conversely the lagger in declines. I fully expect it to lose that trend line on Monday (January 12) barring a market miracle or government intervention.

Most of the major indexes have enjoyed a bounce off the November lows that yielded anywhere from 25-35 percent. But this is far short of the 50 percent correction that usually accompanies most bear market rallies. The surprising thing is that the biggest gains have come from small to mid cap companies, especially those with horrible balance sheets. Many have surged as much as 50-100 percent! Most big cap leaders managed more docile 20-30 percent gains before waffling. That is except for AAPL, which scraped out an anemic 10-12 percent off the bottom, and has been drifting aimlessly ever since. Macworld did nothing for the stock. Although, I must admit that expectations were pretty low going into the event.

So, what’s with the title, “Trade Apple Like a Fool?” Well, if you’re an Apple perma-bull, then you’ve probably convinced yourself that the undeniably strong Apple fundamentals will eventually trump the market. If you believe this, then you truly are a fool. The facts are that both AAPL and the markets are losing critical levels of support, with all the major markets (Dow, S&P 500, Russell 2K, and Wilshire 5K) already cracking that support. The lone exception is the Nasdaq, but that shouldn’t provide any solace, because it’s on the cusp of cracking and it’s typically a lagger behind the others. You need to trade on technicals right now, fundamentals are meaningless.

So what? We’ve lost critical levels before, only to surge through them later. Why am I warning now? Well, I must preface this analysis by saying there is no 100% certainty here, only a preponderance of indicators that have convinced me that the probability is high for a huge decline. Conversely, I must lay the caveat that the interpretation of these indicators is somewhat subjective. That’s why I often say that Technical Analysis is more of an art than a science. In this case, I feel particularly strong that we’ll revisit the bear market lows sooner than later because of a confluence of indicators, and the complete inability for the bulls to extend this rally.

Let’s first look at the failure to extend this rally. The thing that distinguishes a bear rally from a bounce is that with a rally the bulls should be able to capture and hold critical support levels. The most important of which are the 20, the 50 day moving averages. Once those levels are captured, you want to see a successful retest of those level and then to put some distance from them. That bulls captured the 20s, and then the 50s, on two separate occasions. The problem is that they never followed through and continued the rally. And time is not on the bulls side here, as they continue this struggle on the moving average front, their stamina is starting to wane. The more failures they have, and the more time that passes without a strong advance, the more embolden the bears are getting. History shows that you get a limited number of shots at maintaining these levels. The first push is almost always successful, the second is a 50-50 proposition, the third time is hardly ever successful, and that’s the position the bulls are in right now.

If we close below these levels on Monday (January 12) then the bears will be in firm control. The next stop down, at least on the S&P 400 (SPX), will be the 860 level. This level has shown some good support for the bulls recently, but they’ll be battered and weak, and if we move down through that level, the next stop is all the way down to the November lows, or 775. If 775 is lost, then well, all I can say is that it won’t be pretty.

At this point it would be very hard to imagine that we won’t test 860, especially considering the horrific action we witnessed in last Friday’s session. The bulls had every opportunity to hold support, they had the uptrend line, the 20 day and the 50 day moving averages for support. On top of all that, volume was very low, and lastly they had the knowledge that losing that level was absolutely critical. Yet, in the face of all this, the uptrend support line was lost on just about every index. The bears are clearly in control.

There are a few technical factors standing in the way of the bears. They include near-term positive divergences on the 10 and 15 minute charts, and longer-term bullish indicators on the weekly charts. But in this bear market, that’s hardly enough to stop this kind of momentum. And if we move down sharply, those indicators will easily get neutralized.

As I mentioned earlier, the only index that hasn’t yet cracked trend line support is the tech-heavy Nasdaq, but it’s on the cusp. The de-facto leader of the Nasdaq is universally accepted to be Apple (AAPL), followed by Google (GOOG), Research in Motion (RIMM), and Amazon (AMZN). In my estimation, AAPL looks to lead the Nasdaq once again, unfortunately it will down be through the trend line. Apple has shown incredible weakness this past week, as it failed to maintain a strong gap up move at the beginning of the week, as I mentioned earlier. And it finished the week with a very bearish engulfing candle. In fact, compared to other market leaders, AAPL has shown relative weakness the past three weeks. I think many investors thought Macworld might give Apple a boost that would carry it into earnings, but that never materialized. In fact the lackluster showing at its final Macworld worked against the stock.

Investors are uncertain about Apple’s near-term future. With a poor showing at Macworld, more looming questions over Steve Jobs’ health, no clear succession plan, and a very poor economic outlook, all combine to create a very difficult position for Apple bulls.

Disclosure: None

Comments

[herbert hoover:]

Oh oh, now you've done it. You dissed AAPL. Don't throw reality in front of the AAPL bulls. Expect a half dozen irrational rants about how AAPL is going to 400 in the next few months.

Jan 12 08:58 AM

[mikeylikesit41:]

AAPL is going to 400 next month. There I figured I'd be the first idiot.

AAPL is an exceptional buy a $40. This is taking into account not only the current technicals but the decreased demand for high priced consumer products over the next 2 years.

Tech companies will survive but it is now ingrained in most Americans that paying $400 to $600 for the latest, greatest tech trinket is stupid. AAPL even helped them come to that conclusion when it was possible for them to quickly drop the price of an iPhone and still be amazingly profitable. Made everyone feel like chumps.

Regardless, most of the folks that can afford tech trinkets have them now. Now one is going to upgrade their kids iPod because of a few new features. Jim Cramer put it succinctly, iPods and iPhones are jewelry.

So, how many of you are planning a shopping trip to Tiffanys anytime soon?

Middle Class America is starting to save and think thru their purchases now. Expect profits over the next 2 years to be barely enough to cover operating expenses.

Once we recover and people feel secure again, gobble up AAPL like it's sugar 'cuz it's going to be sweet. That will be in 2011.

Jan 12 09:08 AM

[Infinite loop:]

"Guessing" PPS is a fool's sport Mikey.

And riddle me this?

If we have been in a recession for the past year, why has Apple grown 30% during that same period?



"Expect profits over the next 2 years to be barely enough to cover operating expenses."

Um, you're talking about a company with 32% profit margins and no debt. Can you please stop pretending to understand finance.

Jan 12 12:00 PM

[David Forjan:]

Mr. Bass,

You may be right with your opinion, but your rationale is flawed. It's been flawed for some time now. Time to rethink.

Our current economic situation is so different than anything seen in the last 40 years, that technical analysis is not a viable tool. Technical analysis relies on interpreting current market trends in light of how past trends occurred and how they were reacted to. In other words, technical analysis interprets today in relation to history.

Since today's economy is one of only 2 or 3 similar situations going back to the Great Depression, all the past trends and market reactions you refer to and rely on are irrelevant.

There's too many unknowns in our economy to rely on things like support level. I'll bet the accuracy of your predictions relating to support level since mid-2008 were equivalent to a coin toss.

Time to realize that we cannot predict anything with any level of accuracy in our current economic situation.

Jan 12 12:43 PM

[User 175563:]

You assertion that TA relies on past events is completely off mark. TA uses patterns and various other tools to determine mob behavior. The measurement of this behavior has nothing to do with the types of behavior, or what influenced it, or what specific events happened. TA is simply an objective read on the limits to which that behavior was exerted.

What you are describing is like saying that I can no longer measure that line with a ruler, because the line has been made with something not previously seen. Well, I don't care what made the line, I can still use the ruler to measure it.


On Jan 12 12:43 PM David Forjan wrote:

> Mr. Bass,
>
> You may be right with your opinion, but your rationale is flawed.
> It's been flawed for some time now. Time to rethink.
>
> Our current economic situation is so different than anything seen
> in the last 40 years, that technical analysis is not a viable tool.
> Technical analysis relies on interpreting current market trends in
> light of how past trends occurred and how they were reacted to.
> In other words, technical analysis interprets today in relation to
> history.

Jan 12 01:30 PM

[mikeylikesit41:]

Infinite Loop, I'm not guessing. I ran an analysis of the stocks price history, current consumer trends, grabbed some data about savings rate increases, income, housing trends and then projected a national average spending rate. So, yea a little tiny bit of guessing based on historical rates.

It's my opinion, that I base on a lot of data, that folks just aren't going to spend money on trinkets for a few years.

To answer your statement about being in a depression and their profits going up... well that's simple... look at the data! It's only within the last few months that folks realized they could lose their job too. It's only in the last few months that folks realized we are in a recession. It's only in the last few months that folks refi'ed their mortgage to better their monthly financial condition instead of for spending cash. The list goes on and on.

That was slightly interrupted by Christmas but only slightly. Even I spent a little more than I was planning this year. It's hard to spend less than you did the year before on gifts even if you are picking wise useful gifts.

Regardless, all the trends and data indicate less spending cash over the next two years.

Now, the question is, which companies do you think that will affect and what company will be affected the most?????

I would put AAPL in that group near the top.

So, simply extrapolate the price based on less profits and historical P/Es

Jan 12 01:44 PM

[TA:]

'Well, if you’re an Apple perma-bull, then you’ve probably convinced yourself that the undeniably strong Apple fundamentals will eventually trump the market. If you believe this, then you truly are a fool.'

So well put Zach - I've been commenting for years here on how the AAPL fanatics can't see past their own ridiculous bias to make an investment decision and it's ultimately hurt them. They rode it from the high 100s all the way down here and I still think it's going lower.

AAPL is just another company, treat as such.

Jan 12 01:44 PM

[jenny:]

Haha, Apple perma-bulls. It does seem that despite all other indicators the majority of people remain bullish on Apple no matter what. Checking sentiment here (www.predictwallstreet....) though it actually looks that sentiment is extremely bearish even though sentiment for the rest of the market is slightly more optimistic today, although not much.

Jan 12 02:54 PM

[David Forjan:]

Mr. Bass,

I beg to differ. A support level is still an historical line in the sand. If so-called support exists for Apple at $79, then that level should allow support. But as Apple may drift toward that level, today's economy can throw wrenches in that analysis, at any time. Approaching $79, we could easily get news of a huge $800B stimulus package, and the market soars. Does that mean that the $79 was support? No. Or we could get news that China's economy contracted by 10%. Would that magic $79 provide any support? No. My point is that the markets today are subject to a huge effect at any time. So, to rely on some historical line in the sand is like putting your head in the sand.

And I might remind you that you called a market bottom some months back. That wasn't correct, as evidenced by your projection now. Then you were recommending to buy Apple. Now you're in a cash position. Why? Because we all don't know what to expect in this economy in the near term, technical analysis, or not.

As they say, your guess is as good as mine.

david forjan

On Jan 12 01:30 PM Zach Bass wrote:

> You assertion that TA relies on past events is completely off mark.
> TA uses patterns and various other tools to determine mob behavior.
> The measurement of this behavior has nothing to do with the types
> of behavior, or what influenced it, or what specific events happened.
> TA is simply an objective read on the limits to which that behavior
> was exerted.
>
> What you are describing is like saying that I can no longer measure
> that line with a ruler, because the line has been made with something
> not previously seen. Well, I don't care what made the line, I can
> still use the ruler to measure it.

Jan 12 03:05 PM

[Roger Knights:]

Mikey wrote:
"It's only in the last few months that folks realized we are in a recession."

From the hints we've gotten so far, Apple's sales haven't been suffering in the Dec. quarter. We'll know for sure in the Wednesday, Jan. 21 earnings report. I'll be buying in advance of it.

Jan 12 04:27 PM

[Roger Knights:]

Zach wrote, "Apple has shown incredible weakness this past week,"

That was mostly due to the failure to release any refreshes to their desktop line, which many (including me) had expected. And also to the market's unhappiness about SJ's health/succession situation. And finally it's been pulled down by other tech stocks that are looking fundamentally weaker due to bad news about them.

But Apple's earnings and revenue trajectory seem to me to be still in uptrends, as recent deep and data-rich articles by Turley Muller and Andy Zaky have argued. I think the upcoming earnings report will be much better than expected and put a bottom under Apple at 100, at least.

Apple's chart looks to me like it's making a bottom. (It closed today at a bit under 88.)

Jan 12 04:44 PM

[another.ana...:]

Zach says:

"Trade Apple Like A Fool."

Follow his advise (through its many changes & flip flops) & you will accomplish EXACTLY what the title says.

Ayuh

Jan 12 06:40 PM

[Jon T:]

I'm an Apple perma-bull and short of there being a complete an utter melt down Apple is going to continue to sell shed loads of Macs, iPhones and iPods. If it were going to be badly affected it would have shown up last quarter and in a few days we'll really see how it is faring.

The iPhone is going to do what the iPod did to MP3 players and music distribution. One research analysis today gives Apple 40% of the smartphone market by 2013.

Business is moving into Mac and this powerful trend that will see Apple prosper as traditional pc makers watch their marketshare walk...

Long live APPL-perma-bulls! I'm long APPL, very long. By the time I take my pension in 2019 it will be a very valuable shareholding indeed.

Jan 13 09:27 AM

[joeldude:]

I distilled this 'stock analysts' report down to it's own truth, you can do this with any columnist and see what they are really saying, (if anything):

" have no position in Apple (AAPL) right now, and haven’t for a few weeks...and it’s time to take a stand." - your opinion is merely that, an opinion w/out facts...

"I fully expect it to lose...If you believe....you are a fool." - you are truly the fool for writing this misleading drek...

"fundamentals are meaningless...So what? I often say...I feel particularly strong..." - who acres how you feel, this is business, not psychology...

"All I can say is that it won’t be pretty...the bears are clearly in control." - we knew that information...

"As I mentioned earlier......Macworld worked against the stock and Investors are uncertain..."...we knew that already as well, you are a hyped news reporter with no where to go ;-(

Jan 13 11:36 AM

[brewer:]

Don't trade it, buy it and keep it.

Apple devices are about the farthest thing from a trinket. They only look like jewry compared to the other devices which look like industrial waste (and work about as well) by comparison.

I guess if Cramer told you the internet was a fad, you'd believe that?

Jan 13 03:34 PM

[F. J. Taylor:]

Mr. Bass is right about the state of the market in general, and the deteriorating economy being unfavorable for any non-essentials.

I also wouldn't be surprised if Apple continues to slide during this market - but not because it is over-valued or any of the other usual reasons.

However, if it slides, it will mainly be because "the market" seems to be composed of manic-depressives who practice voodoo instead of looking at fundamentals, and because of articles slighting Apple stock, not because of any weakness in the company or products.

Obviously the market is down, and we are in a depression IMO (which, BTW, I saw coming over two years ago and cashed out of a lot of my holdings while they were high - except for half my Apple, which I kept -and so I am now playing with "house money")

However, Mikey is incorrect to state that the iPhone is a "trinket" of "jewelry" - while its usual superb Apple styling may give it that appearance, it is actually one of the most remarkable electronic devices in modern times - far from being a mere "smart-phone" or glorified MP3 player (which it is), it is the first true MID (Mobile Internet Device) - and a hell of a lot more besides. With the native apps, and the burgeoning third-party apps, it has an enormous amount of potential to become one of the greatest mind-tools ever developed.

It is truly astonishing - so much so, that even I, a long-time Apple user and booster, was amazed when I finally got my 3G recently - I knew of some of its capabilities, but was blown away when I finally got into the workings!! I don't have time to detail the device and all its capabilities here, but go to the Apple site and take the tour - or better yet, walk into an Apple or AT&T store (or your local Walmart or Best Buy) and get a demo.

I have also purchased one for my step-daughter (my step-son got one of the first ones), and am planning to get one for my wife shortly as well. I will be switching our lines to AT&T from my long-time favorite Verizon (albeit reluctantly, as I have been with them for over 12 years), and that means AT&T (and Apple) will be getting monthly income of about $125 for two years. I am not the only one I know who is doing this.

Apple has enormous potential to revolutionize the entire phone AND computer industry (they are already inspiring iPhone wannabees from all the major and many minor players) - and I believe they will.

While I agree not everyone will be able to afford one, especially now, that has always been the case with Apple products - though I personally wish everyone could have them - they are such a pleasure to use!!

And of course, these are only one product - there also are the iPods (especially the brilliant Touch, which was my "gateway drug" into iPhones), Air, the MacBook line, the iTunes music and video business, and all the marvelous hardware and software they are so justly famed for - far easier to use, superbly styled, and with killer customer service and support - and a lot more besides!

My own intention is to hold my remaining Apple stock - and buy more when I think it has hit bottom. Of course, this is only my take and strategy - everyone should think for themselves and do what you need to for your individual circumstances.

As to the economy and society in general - I hope we will all be around to see a better time and place than that which is currently shaping - but knowing people and history, I am always a bit dubious. Good luck to you all.

Jan 15 02:46 AM

[L. SMITH:]

"Technical Analysis is more of an art than a science".

WRONG, TA is NOT art and NOT science, it's a GUESS WORK.

Your guess is as good as anyone else's.

Fundmental and market perception make stock goes up or down.

Jan 15 07:35 AM