Wednesday, April 04, 2007

Do Not Sell AAPL

Because of this post unless you are personally convinced that the end is near.

If you are in a swing trade based on the dummy spot on 2/28 I believe that the stock signaled the end of the trade on 3/27. If my calculator is correct that’s about a $14 gain or about a 17% appreciation and it’s probably a good time to cash in and take the profits down.

However if you are in AAPL since it was just a seed you have a different problem – sell or do not sell. Let’s say you got in two years ago at 33. Within 8 months or so it hit 86 and then, using the weekly charts which long term holders should be watching, it printed a suspicious looking dual candle that might have been a tweezer top if they didn’t have 2 cents difference between them. Well I accept a “cents” variance on the weekly charts as being nearly the same as a real tweezer and that tells me a very crisp story. This stock is going down.

In the next two and a half months AAPL retraced 50% (fibbonacci number). You can see the retrace at point “a”. But as it happens many times the stock recovers about half of its retrace and then turns south again. (This is what Bollinger termed the “head fake” – you see it all the time). This time the stock retraced to the 62% level and at that point it culminated in a BOB. (I round .618 to 62%).

Now once again here is the story of BOB – pay attention. People who sold at the “tweezer top” and reacquired at the 50% retrace are pretty much stuck in the stock down to the BOB. This is because when the stock turned around and went up at the 50% level they marked that as a support. So when the stock turned around again and went back to the 50% level they weren’t concerned – it is only after it dropped through that level that the concern began because now they were enduring losses. That little white candle in the third week of June gave them some hope and then it failed again and finally they reached the end of their rope. This is the point where they are going to sell out, take their losses, and quit the stock for good. And that is why the volume is higher on the second candle of the BOB formation than on the first – capitulation selling by the retail trade. The pro’s all know that a 62% retrace, while not common is common enough not to worry about – the retail trade panics and dumps out at any price. The pro’s gap it up again in the next week and load up enough shares extra to sell to the retail trade they know can’t resist buying AAPL.

And sure enough – the retail trade seeing the stock turn around again the following week starts buying again. These are probably the same folks who sold it not a week or two ago and were never going to buy it again. This pattern is the same on all time frames. Every stock has a core constituency – a group of buyers who will stick with it forever no matter how the professionals abuse them using the very object they love.

But let’s complete the story of AAPL – or at least bring it up to date.

This is the latest year of AAPL. Once again there was a close-to tweezer top (20 cents variance). That signaled a 47-dollar gain from the BOB and if that wasn’t enough I don’t know when you greedy-guts will be satisfied. Since then AAPL has gone down a little and up a little and literally nowhere at all.

If AAPL does start going down I wouldn’t panic – I’d just sell once it passed 90. I’d reacquire on the 50% retrace and, worst case, buy some more on the 62% retrace.

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