Apple, As Viewed From a Cycle Trader's Perspective
I am a trader who does not fit the strict definition of either "Day" or "Swing". My article posted earlier this year caused some questions on how I really trade. Well, I trade when the Technicals tell me to do so without any time frame, and I call myself a Cycle Trader. Okay, now that this is out of the way, allow me to have a review of my trading technique that I share with my group in our community. I trade on three legs: Fundamentals, Technicals and News. What has worked for me is a system using the fewest Fundamental and Technical metrics to minimize research while objectively improving the probability of a more profitable trade. This system is based on over 20 years of trading and running/improving productivity globally. I was not a cycle trader and just found myself evolving to one while adapting to current market conditions, and factoring in being retired and preservation of capital takes on a major consideration while still believing that keeping money, either under the mattress or earning below inflation rate, is a desecration of capitalism. As you can see, I am a capitalist.
Let's use the over and widely analyzed common stock of APPL using current data. I use three Fundamentals one of which is the Morningstar Rating (NYSE:MR). The other two are Free Cash Flow (NYSE:FCF) and Debt to Equity Ratio (NYSE:DE). The MR is a catch all to measure the valuation of the company with three star benchmarked as neutral and five star a well discounted buy. The FCF is my metric on the business' ability to weather financial storms but this metric must be taken in concert with the DE to make sure the figure is not inflated by liability. I benchmark DE at 0.3, the lower the better. Today, (Dec. 24, 2012) AAPL has the following Fundamentals:
MR = 5 Star (Last Price hovers are $523, Fair Estimate is $770, Consider Buying at $539)
DE = 0
FCF = $41,454,000,000
AAPL shows exceptionally healthy Fundamentals. In my quantified table, AAPL garners a perfect score.
I use my select Technical metrics (indicators) to guide me in defining my entry and exit points along with where to set my protective stops. I use the following in a system allowing only one to digress but prefer that all metrics agree. The Bollinger Band (NYSE:BB) is my primary indicator in concert with the Exponential Moving Average (NYSEMKT:EMA) and Moving Average Convergence Divergence (MACD). If needed, I confirm the MACD with the DMI (will skip this indicator for now) and use the Parabolic Stop and Reversal indicator to set my initial Stop Loss ( I also will skip details on this indicator for now). The position of the price on the BB guides me to go long when it is at or close to the bottom with the EMA level or trending up, and the MACD trending up. On the other hand, I go long when the price is at or close to the top with the EMA and MACD trending down. As of Dec. 24, 2012, 10AM EST, the Technicals are as follows:
BB = The last price of $522 is just below the EMA and I interpret as neutral,
EMA = Flat (in this case, I look at DMI and it shows a weak start of bullishness). I
Interpret the EMA and DMI neutral but to be monitored closely for later or
next day potential upturn.
Summarizing, the price momentum of APPL is in neutral territory as of the morning of Dec. 24, 2012 with a more favorable trend, although still weak, to go bullish in the near future. And, this is where News comes in. I factor in the impact of News when my indicators are in the neutral territory; otherwise, I tend to ignore it. Where AAPL is at the time of this analysis, News will most likely impact the direction of the price either way. Now let's address the fiscal cliff where APPL is concerned. I believe that the negative impact of going over the fiscal is already mostly reflected in current AAPL's pricing. Any positive development in fiscal cliff negotiations, I believe, will significantly point AAPL to a more robust bullish direction. In summary, this cycle trader is holding off going long and as part of my disclosure, I am long on AAPL and will be on hold. I plan to buy more shares depending on a convincing positive synergy among my Technical indicators.
Disclosure: I am long AAPL. 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.