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I am old enough to remember watching black and white TV shows as a kid and still remember listening to a robot give warnings "danger danger" which is what goes off in my head when I look at the monthly chart of Apple Inc.(NASDAQ:AAPL). As a trader I believe my primary job is to identify repeating patterns. The market generates a lot of patterns to look at. For people on either coast you have wave patterns. Those who went to MIT or Harvard can try to figure out Gann Squares and how the number 9 is the key to riches. Some try to figure out how the patterns between price and earnings are relational and others look at growth and cash flow. I have to wonder at times if any of these numbers are real or they just make it all up because you can take two or more different companies and look through the SEC fillings and find no material differences and one company will have double the market cap of the other. How does one make sense of all that?

I am from Wisconsin so I am required by law to learn Tom DeMark patterns (Tom DeMark is from Wisconsin). It's one of the better laws in the frozen tundra because as soon as I started to learn and obey the signs on the road (especially the speed limits) of trading I started to really find success. I met Mr. DeMark about a year ago and the biggest frustration for me and others was the session was too short. I would easily sit solid through a month of his lectures without any hesitation (Hmmm, maybe a new business idea for Tom's company "Market Studies" is MarketStudies and Seminars?)

Tom's services are "expensive" and "cheap" all at the same time. The subscription is expensive even by Tom's admission, but I am not sure it's justified to call something "expensive" when it makes money for you. Calling MarketStudies expensive is like saying the mall rent is expensive, but if you moved away you would lose all your sales.

Even though I know DeMark indicators well and talk about them almost every day in my chat room, I don't often trade based on them alone. They do signal setups, but to really have the best success I found using in combination or changing the signals outright can improve the performance. I read a book by Perl who does a fine job of breaking down the various indicators and providing entries and exits. If you have not read any of Tom's books, get the one by Perl first as it's an easier read, but then follow up with "the real thing" DeMark books which after Perl's will be much easier to take all in.

Right now I will cheat a little bit and simply let you know my chart says Apple's monthly chart is a TD10 Combo based on the settings I like. Interestingly enough, the weekly and the daily are all TD10s too.

The rules are simple; it's not time to short Apple yet based on my read of Apple. And if it's not overbought (yet) Apple has lots of room to move higher. I should clarify what "IS" overbought. Overbought for me is the price so far beyond reality the odds of a significant retracement are well over 95%. It's at those times I like to push a lot of my chips into the middle of the table. I did short Apple today, but I surgically went in, pic-pocketed a few Wall Street guys and got out of town quick before they knew what hit them. I almost bought in again looking for the afternoon rally, but didn't want to get my hand caught in the cookie jar.

As pricey as the stock may be in real dollars per share, arguments can be made about Apple as a value buy or overbought.

Look at some of the comparisons of companies that had large moves in price.

Apple

Netflix

Intel

Green Mt

CRM

Quarterly Revenue Growth (yoy):

73.30%

47%

21.2%

101%

38.30%

Total Cash (mrq):

30.2B

800M

14.9B

84M

777.87M

Total Cash Per Share (mrq):

32.35

14.4

2.97

0.50

5.68

Total Debt (mrq):

0

434M

7.42B

488M

557.15M

Forward P/E

12.3

41

10.5

14

72

Operating Margin

37%

12%

32.3%

15.5%

-1.5%

On the first line we examine revenue growth and obviously Green Mountain (NASDAQ:GMCR) numbers are not expected to come in the same city, much less the same ballpark.

No one even comes in close to the amount of cash Apple has piled up. It would appear Apple has figured out the perfect formula for producing iProfits. Netflix (NASDAQ:NFLX) for a while appeared to have captured the magic formula, but now it appears "not available online" is the new motto. The price chart reflects what happens when you lose the magic.

Intel had a large move higher and back down again, but it can almost be forgiven for simply being caught up in the dot com crazy days. I like Intel (NASDAQ:INTC) and went long (sold put options short) when it was trading last near 19. Intel is a solid company and demonstrates that even solid producers become "in play" once in a while.

Salesforce.com (NYSE:CRM) is still playing out and it's one of the reasons why I included it here. Salesforce made a TD13 on the monthly chart back in May 2011 and shortly after dropped about 30% before moving back higher again. Will Salesforce.com after dropping so much continue higher to break the previous highs made in 2011? I am not sure, but some obviously believe so. If people believe Salesforce.com will move higher in price it would appear Apple certainly can. In the above numbers I see nothing that looks more attractive about Salesforce.com compared to Apple. Of course there are many other metrics to look at, but we do have the key numbers above and they appear representative of the overall picture in both companies.

Given the current volatility levels of Apple, one way to take advantage of Apple excitement if you want to put a bullish position on is with stock options. With the use of option spreads an investor is able to capture time premium so that every day is working for the position and risk remains limited and defined.

For example, let's look at the May series options. A May Apple $570 call option is currently trading for about $53 while Apple is near $595.75. With a simple option buy, a time premium of about $27.25 is priced in. To offset the time premium of the purchased call, another call can be sold creating an option spread. For example, if an investor believed $620 is the likely top area of Apple from now until the May expiration date, a $620 May call option could be sold for about $31. The net cost for this transaction would be about $22 and the profit potential would max out at if Apple trades at or above $620 into option expiration for a return of $50. It would be a little more than double. Interestingly enough, the simple buy option strategy loses money if held until expiration unless the price moves above and beyond $622. There is a big difference in return depending on the type of strategy you employ.

The same can be said in reverse with put options for those who believe Apple is soon to fall like some of the other stocks listed here. I believe we may be early (I have intraday shorted Apple as recently as yesterday), but I also believe it's much better to miss a few than get caught on the wrong side of trade. Regardless of the type of pattern you look for, make sure you have a written plan before making any moves. Don't let your investing get ruled by emotion, especially when "everyone" is talking about how much they are making with any stock.

I use a proprietary blend of technical analysis, financial crowd behavior and fundamentals in my short-term trades, and while not totally the same in longer swing trades to investments, the concepts used are similar. You may want to use this article as a starting point of your own research with your financial planner.

Source: Buying Apple At These Levels Is Not As Crazy As It May Appear

Additional disclosure: I may go long and/or short AAPL over the next 72 hours.