Jeff Pierce's  Instablog

It's a valid question because no one stock should really dictate the direction of the Nasdaq, even with a weighting as large as AAPL. Since we all have really short term memories it's easy to say that the Nasdaq cannot go up without Apple, but when you view the monthly chart (last one) below, but it wasn't until 2005-now that Apple has gone on a ballistic run that has catapulted it to the top of many mutual fund's holdings. That in itself could be bearish if you subscribe to the theory that when everybody is on one side of the boat then it's close to the time when something bad is about to happen.

About the only way I see the markets rallying is if we start to see some serious sector rotation going on to pick up the slack should Apple's stock start to slump and go into some sort of a longer correction. A few days ago I thought Apple had survived it's 50 day ma test, but Friday's action seems to suggest that isn't the case as sellers resurfaced.

There is a head/shoulder pattern forming on the 60 minute chart and my own indicators say that Apple is heading to $560 as part of a larger correction that needs to take place. The weekly chart is top heavy and nothing rises forever. We may bounce and rally up to resistance as the loyal Apple enthusiasts believe their stock is invincible….but all stocks eventually fall under their own weight and Apple has a long ways to fall.

Even though I am suggesting Apple is about to undergo a correction, I personally would not short it. I never short strong stocks and I never buy stocks in severe downtrends. That is my preference and all traders must do what suites their personality.

Short term we are seeing weakness in Apple which hasn't completely dragged the Nasdaq down.

(click to enlarge)

Last 16 months these two charts have been a mirror image.

(click to enlarge)

Apple's run is unsustainable.

(click to enlarge)

List of funds holding Apple.

From an article in USA Today last March.

Normally, enthusiasm for a particular stock can be worrisome: If most funds already own the stock, there may not be many more buyers lined up. And mutual funds aren't the only Apple fans: Institutions, such as pension funds, own $310 billion of Apple. The total fund industry owns $156 billion, says Morningstar. Wall Street currently values the company stock at $550 billion.

By Chris Ebert

An analysis of stock options reveals that traders of Cirrus Logic (CRUS) are likely to feel strongly bullish. The analysis also shows that the stock was way overdue for a correction. The recent decline from the $45 highs of early September should go a long way to satisfy those traders who felt that Cirrus had simply risen too far, too fast.

(click to enlarge)

Because option premiums are based on emotions, the profitability of these trades is highly dependent on emotions as well. The profit or loss of option trades can therefore reveal the emotions of traders. If the emotions are known, the decision of when to buy or sell a stock can be made with more confidence. A study of stock options can therefore be helpful, even for traders who do not trade options or understand how they function.

• Covered call performance reveals whether traders feel bullish or bearish
• Long call performance reveals whether traders feel a stock is strong or weak
• Long straddle performance reveals whether traders feel surprised

For a complete description of the methods employed to complete the options analysis check out this recent analysis of Cooper Tire (CTB) options.

(click to enlarge)

Covered calls opened with a strike price that is the same as the CRUS share price (often called the at-the-money strike price), and opened a moderately long time before expiration, in this case 112 days, have returned a gain every week in 2012. The profitability of these trades occurred despite some significant corrections in the share price. When covered calls are profitable, traders tend to feel bullish. Because these trades will remain profitable unless the share price falls below $26 in the next few weeks, if that $26 level is reached it would very likely represent a significant switch to bearish sentiment.

(click to enlarge)

Long calls opened at-the-money, 112 days prior to expiration have also been profitable for every weekof 2012, although there were two occasions on which they only broke even. When long calls are profitable, traders tend to feel strength behind their bullish convictions. Long calls will remain profitable unless the share price declines below $32 in the next few weeks. So $32 represents a significant level where traders will begin to lose conviction in their bullishness.

(click to enlarge)

Long straddles opened by buying an at-the-money call option and a put option at the same strike price, 112 days prior to expiration have been highly profitable recently. These profits do not represent a normal condition, but instead reveal that the share price moved much further, much faster than most traders expected. The recent correction has returned straddles to a more normal range of profitability.

It is quite possible that the pullback to $38 represents a sufficient correction to satisfy most traders. But further analysis of long straddles also indicates that the share price could fall as far as $32 in the next few weeks before reaching a level that would indicate the stock was due to break out of its recent trading range. If that $32 level is reached, it would likely be followed by either a re-test of the recent $45 highs, or an all-out selloff that might push the shares back below the $30 level where the previous breakout occurred this past July. So $32 is an important price to watch for, not only because the performance of long straddles suggest a possible breakout at that price, but also because the performance of long calls suggest a drop in bullish strength at that price.

Possible option trade based on the options analysis:

While there are many possible option trades that could be opened given the above analysis, the use of protective puts is definitely one to consider. For traders willing to take a chance on buying shares at the current $38 level, given the importance of the $32 level in marking a change in short-term sentiment, protecting those shares by buying puts at the $32 strike with the October 20 expiration is one possible strategy. Given the relatively low premium on those options, it is possible to over-protect the shares, that is to buy more than one contract for every 100 shares of stock.

Overly Protective Put example:

BUY 100 SHARES CRUS @ $38.00

BUY 3 $32 OCT 20 PUTS @ $0.40

This option trade can be thought of as a high-deductible triple-indemnity insurance policy. The high deductible applies because there is no protection for the shares unless the price falls below $32, so the insurance premium is much lower than the $2.00 per share required for a zero deductible $38 strike put option. The triple-indemnity applies because if the share price does fall below $32 the insurance benefit is then three times the amount of damage, less the deductible.

Note: Performance of option trades is extrapolated where the necessary strike prices and expiration dates were not available in actual trading.

The preceding is a post by Christopher Ebert, who uses his engineering background to mix and match options as a means of preserving portfolio wealth while outpacing inflation. He studies options daily, trades options almost exclusively, and enjoys sharing his experiences. He recently co-published the book "Show Me Your Options!"

Related Options Posts:

3D Systems Options Reveal Correction Underway

ASML Options Analysis - Buy On Pullback

Pfizer Stock Options Pointing To Another Rally

By Financial Tap

The following is a brief excerpt from the premium mid week update from the The Financial Tap, which is dedicated to helping people learn to grow into successful investors. They offer a FREE 15-day trial where you can experience their proprietary cycle research, weekly updates, and real time alerts. 15% off with coupon code: ZEN

$US DOLLAR - Cycle Counts

The Dollar Cycle threw us for a little bit of a loop this week, turning lower from a position where one would normally expect to see continued strength and follow through price action. That's because the reversal on Day 10 signaled willingness from this Cycle to keep pushing higher, all but eliminating the fear of a Failed Daily Cycle. Despite the relatively (for this environment) positive jobs picture (Dollar positive) and reduction in the unemployment rate, the Dollar instead has turned lower and was at one point within just 60 bips of a failed Cycle.

(click to enlarge)

So we're left with a little bit of a dilemma here, this Cycle weakness leaves the door (just slightly) open for a marginal Daily and Investor Cycle failure below 78.60. If the Cycle continues to move lower and break previous lows, we might be left with a technical Cycle failure but with bullish diverging indicators. This means that although price could make new lows, the technical indicators could be much more positive compared to the prior low (15 days ago). I certainly cannot rule out the possibility of such an event, but I can almost rule out the possibility of a significant decline below 78.0.

My primary thesis remains that this is the first Daily Cycle, the previous Cycle Low having met every single requirement for an ICL, so until proven otherwise the call needs to stand. Therefore I will be operating under the premise that this will be a short and weak 1st Daily Cycle. I've been seeing a pattern of short and flat Dollar Cycles recently, and in light of the downward pressure placed by QE, this is not an unreasonable explanation.

Previous Financial Tap Posts:

Time To Establish New Gold Positions

Does QE3 To Infinity = Next Leg Up?