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Mike Rest
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My investing interest began when I completed the book, "How to Make Money in Stocks", by William O`neil. I have been an affiliate of the Market Technicians Association for over 10 years and have passed all 3 Chartered Market Technicians exams. I have an MBA in Finance as well. I invest... More
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  • Should You Buy Apple On This Pullback

    As an investor, the name Apple (NASDAQ:AAPL) is synonymous to the likes of Qualcomm, Cisco, and many other high flying stocks of the past that have made investors a small fortune in a relatively short time. During their run, it looked as if they would never correct. Many investors cashed out too early and some never entered a position for fear that they were getting in at the top. Apple is the new king of the hill. Apple has had a terrific run. However, Apple has lost a little over 10% recently. Is this just a normal pullback or something more? Let's examine Apple using both technical and fundamental analysis.

    Technical Analysis

    In the short term, Apple looks like it may be in some danger. It has crossed below both the 20 and 50 day SMA. The 20 day SMA has also turned down. The 50 day SMA is trending up to flat. Another note is the RSI, or relative strength index, has crossed below the 50% line and is heading down. During most of Apple's run, the RSI remained above the 50% threshold. Finally, Apple may have made a short term head and shoulders top. It has broken the neck line but the volume was not excessive. The head and shoulders pattern may be a continuation pattern.

    (click to enlarge) Daily Chart

    Long term Apple is still in an uptrend. It is well above its 200 day SMA. Its weekly trend is intact and while its RSI is trending down, it is still above 50% using a 14 week period.

    (click to enlarge) Weekly Chart

    In summary, Apple should be watched carefully in the short term. Technically, there are several things to watch for. First, watch if Apple retraces to its short term head and shoulders neck line. If it can get above that neckline and make a new high, it should continue upward. If the neckline acts as a ceiling, Apple could move down to around 600. The other short term telling sign will be if the 20 day SMA crosses below the 50 day SMA while both moving averages turn down.

    In the long term, watch the 200 day SMA. A break below that key moving average would be a negative sign. For now, the long term trend is intact.

    Fundamental Analysis

    Fundamentally, Apple is one of the most sound companies in the world. Sales growth over the past five years has been 41.16%. EPS over the past 5 years come in at 64.95%. Gross margin is at 44.11%. In the past, earnings and sales growth have not been an issue at all. In fact, they were incredible. Apple has a P/E of 15.00 and a forward P/E of 11.96. It has a PEG ratio of .67. This compares to the average S&P P/E of 16.44. Even at over $600 per share, Apple is considered cheap.

    The biggest question facing Apple is can it continue its dominance. Apple has crushed multiple industries. It has revolutionized the mobile phone market and decimated the PC market. The question now is what is the next big thing that Apple will create. As analyst Damon Vickers says, will Apple be where the puck its going.

    Buy, Sell or Hold

    What you decide to do with Apple's stock depends on whether you currently own it and what your time frame is. If you currently own Apple and want to keep it for the long term, it is a not a bad idea to buy some put options as protection. Going out 3 months and buying puts that are 10% out of the money could save you form getting hurt if Apple continues its down trend. You can also offset some of the cost by selling out of the money calls that expire in less than 1 month.

    As of right now, I would not initiate a new position on Apple based on it's weak short term technicals. There are two options here. You could wait until Apple breaks above its 20 day and 50 day moving average and then buy the stock. Alternatively, if you feel that Apple may continue lower in the short term and you still want to buy the stock, you could sell come puts and collect a premium while you wait and see if Apple reaches your strike price. If Apple does not reach your strike price, you will at least get some money from the premium.

    Regardless of what you decide, there is no denying that Apple is a growth story that will be studied for years to come. Unlike many of the high fliers of the past, Apple does not have a P/E of over 100. It is a true cash generating monster. Can Apple continue to impress fundamentally? The big question is whether Apple can remain one step ahead of its competitors. What will be the next revolutionary product and will Apple be the creator? We shall see what the future holds.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

    Tags: AAPL, long-ideas
    Oct 09 10:14 AM | Link | Comment!
  • Using Multiple Technical Indicators Together

    Technical Analysis is a method investors and analysts use to forecast the price of an equity or commodity. There are many indicators that are available when using technical analysis. The most common indicators used by investors are the 50 and 200 day moving averages. The basic concept is to buy a stock that is trading above these 2 averages. Furthermore, the 50 day moving average should be above the 200 day average and both averages should be trending up. The chart below is an example of a stock meeting this criteria:

    You can see that the blue line is the 50 day and the red line is the 200 day moving average. Both averages are trending up, the 50 day is above the 200 day and the price of Apple(aapl) is above both averages.

    Relative Strength Index(RSI) and the 20 day SMA

    While using just the 50 and 200 day simple moving averages to determine your buy and sell signals will put you on the right side of the trade more often than not, there are other technical signals that can make your analysis more successful. Using the RSI and the 20 day moving average are 2 of those indicators.

    The RSI oscillator is a momentum indicator that compares the magnitude of recent gains to recent losses in an attempt to determine overbought and oversold conditions of an asset. It is calculated using the following formula:

    RSI = 100 - 100/(1 + RS*)

    *Where RS = Average of x days' up closes / Average of x days' down closes.

    Developed by J. Welles Wilder, the RSI indicator says that an equity is oversold when the RSI indicator dips below 30 and overbought when the indicator move above 70. This is the way many use the RSI. However, there are many other ways to use the RSI indicator. One theory says that an equity whose RSI is below 50 is weak and above 50 is considered strong. When used in conjunction with other technical indicators, the RSI can help the investor make a better buy or sell decision.

    The 20 day simple moving average is another indicator that can be used in with the 50 and 200 day sma. It follows the same rules as the before mentioned averages. The investor should only buy a stock that is above the 20 sma and the 20 sma should be above both the 50 and 200 day sma. The 20 day sma will produce quicker signals and will react faster than the longer moving averages.

    Putting it all together

    Now that we know what indicators to use, let's put them all together. There are many free technical screeners that you can use on the internet. These screeners allow you to input your criteria and then they will look for stocks that are a match. My favorite is FinViz. FinVIz allows you to enter descriptive, fundamental and technical data. You can also save multiple screeners.

    Stocks that are a buy will meet the following rules:

    1. The price will be above the 20, 50 and 200 day simple moving averages.

    2. The 20 sma will be above the 50 sma, and the 50 sma will be above the 200 sma.

    3. The 20 and 50 sma averages should be sloping upward. A 200 sma with an upward slope makes the analysis stronger, but a flat 200 sma with an upward bias is ok.

    4. The RSI will be above 50, preferably trending up or sideways.

    Here are some examples using just these 4 technical indicators:

    (click to enlarge)

    (click to enlarge)

    You can always make your search stricter by adding descriptive or fundamental rules. For instance, if you only want to invest in U.S. stocks that are over $20, pay a dividend over 2% and trade an average daily volume of 1M shares or more, your search would yield less results. Here is an example:

    (click to enlarge)

    You can customize your search however you like.

    If you are looking to short a stock the rules would be as follows:

    1. The price will be below the 20, 50 and 200 day simple moving averages.

    2. The 20 sma will be below the 50 sma, and the 50 sma will be below the 200 sma.

    3. The 20 and 50 sma averages should be sloping downward. A 200 sma with a downward slope makes the analysis stronger, but a flat 200 sma with a downward bias is ok.

    4. The RSI will be below 50, preferably trending down or sideways.

    Here is an example using just these 4 technical indicators:

    (click to enlarge)

    This is just one method of using multiple technical indicators. There are many others. The next step, after buying or shorting your stock, will be to determine your stop loss. An investor should never lose more than 6% on any one investment. Using options to hedge your investment is a wise move. If you choose not to use options as a hedge, never move your stops. Capital preservation is very important.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Oct 05 11:47 AM | Link | Comment!
  • Using The Stochastic Oscillator

    The Stochastic oscillator was made famous by George Lane. It's premise is that in an uptrend, closing prices have a tendency to close at the upper end of the price range. In a downtrend, prices tend to close near the lower end of the price range. The two lines used by Stochastic are the %K line and the %D line. The %K line is more sensitive of the two and the formula is:

    %K = 100 [(C - L14)] / (H14 - L14)]

    C = the latest close

    L14 = the lowest low for the last 14 periods

    H14 = the highest high for the same 14 periods

    The formula measures from 0 to 100 on a percentage basis where over 80 would be a closing price near the top of the range and below 20 would a closing price near the bottom of the range.

    The %D line is the second line. This is a 3 day moving average of the %K line. This formula is known as fast stochastics. If you take another 3 period average of %D, the result is known as slow stochastics. Slow stochastics tends to give more reliable signals than fast stochastics.

    (click to enlarge)

    As the image shows, the fast stochastics tends to give a more erratic signal than the slow stochastics oscillator.

    Stochastics can be used on minute, daily, weekly or monthly charts. The indicator usually works best in a sideways market. When using stochastics, use another indicator such as the RSI indicator to confirm the signal.

    Ways to use the Stochastic Oscillator

    The first and most common way that stochastics is used is to look for divergence between price and the stochastic signal. If the price of an equity continues to move higher while the %D line makes 2 lower highs above 80, this is bearish divergence. On the other hand, if a stock is makes lower lows and the %D line makes 2 higher lows below 20, this bullish divergence. The actual buy or sell signal comes when the %K line crosses over the %D line. Many will use divergence even if the oscillator is not in overbought (above 80) or oversold territory (below 20).

    Jake Bernstein, author of The Compleat Day Trader, uses the slow stochastic oscillator in day trading in a different way. Mr. Bernstein recommends using 5min, 10 min or 15 min charts for this method. He also uses 75 as the top of the range and 25 as the bottom of the range. His findings showed that when a stock was moving higher and the %K line crossed over 75 (overbought) the stock would usually explode higher and should be bought. He states to close the position when the %K line crosses below the %D line, even if the cross occurs above 75.

    (click to enlarge)

    To short a stock using this method, Mr. Bernstein would look for the %K line to go below 25 and not cover until the %K line crossed above the %D line, even if it is below 25.

    (click to enlarge)

    The last method is one that I use. If the market is trending in one direction, I will use the Slow Stochastic Oscillator to time my entry points. I will only trade in the direction of the trend. For example, if stock XYZ is in a strong uptrend and is now pulling back, I will look to enter a long position when the stochastic indicator has corrected and has turned up with the %K moving above the %D. I like to confirm that XYZ is still strong by confirming the move using a RSI>50.

    (click to enlarge)

    If a stock is in a downtrend, I will look to initiate a short when the stock bounces higher but fails to break the trend. I will wait for the stochastic indicator to turn down and the %K line to fall below the %D line. I also use a RSi<50 to confirm the move.

    (click to enlarge)

    This method can be used on daily charts, swing trades and day trades. The signal will be less reliable as the period shrinks.

    These are just 3 methods of using the Stochastic Oscillator. There are many others. Some people change the time periods to a shorter period for a quicker response. Some will buy only when the indicator crosses from oversold (below 20) to trending up (above 20). No matter how you choose to use the indicator, the key is to not keep adjusting it. Use it one way and stick to your rules. No indicator is perfect. The object is to have a disciplined approach and follow it.

    Sep 25 11:51 AM | Link | Comment!
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