AAPL Thoughts – Part I (by Leaf West)

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Phoenix_13As we all know AAPL is an incredibly important stock in terms of its investor following and its index weighting.  If any stock today can give us insight into the market's animal spirits, AAPL would be the one.

I'm going to blog about AAPL in two parts … the first one is just an analysis of the trading of AAPL on Friday based on the 5-min chart.  Nothing more, nothing less … just looking at how you should have traded AAPL on Friday without any bias from higher time frames.

The reason I think reviewing a day's trading set-ups as being important is that these methods/set-ups repeat.  Not only for AAPL or the SPY, but in all stocks/ETF's.   If you don't believe me, go back and look at my SPY trading analysis … you'll see the same thing over and over.  Again, its all about becoming a better fisherman.

My Part II blog will be a more in-depth analysis of AAPL on higher time frames.  Included will be some analysis of what to look for in signals or signs in the days ahead.  This will be a part of my weekly newsletter which goes out on Sunday evening (make sure you sign up for it!!).

So, let's get started:


Again, let's look at AAPL with no bias for direction.  Some times a bias can hurt us and some times it can help us.

I posted the following chart around 10:10 am yesterday morning …

AAPL_Jan21, 2011_Wedge

What happened to me was that I called up aapl for the first time around 10am and noted what I saw as a wedge forming … that immediately caught my interest for a couple of reasons.

  1. During the first 1/2 hour of trading on Friday, the SPY (i.e., the market) broke its first 5-min candle's high and made a bullish move towards our $129.20 expected resistance level.  AAPL was clearly under performing the market … normally when this happens, it is a sign of real weakness.  When the SPY eventually weakens/pulls back, you can expect AAPL to really get going to the downside for at least a good scalping opportunity.
  2. I posted the chart below on Thursday around 12:30pm … in it I was looking at AAPL's 5-min chart in terms of a potential 5-wave structure that was unfolding.  I raised the possibility that the move up from Thursday's morning low could be just the wave 4 and that if that was the case, we could expect a wave 5 push to new lows (go to that blog post).

Now as an aside teaching note … I would like to point out that it is important if you are going to become a profitable trader, you should always be looking for potential pattern set-ups.  This allows you to plan a trade out ahead of time and to maximize a trade's profitability.  Here I thought I saw what looked like a 3rd wave having been made by AAPL and therefore, if that was right, I could expect a wave 4 retracement and then a wave 5 push to new lows.  One never knows how high a wave 4 move will go so it is often best just to play the wave 5 move when it is signaled.  I have an advantage in some ways as my eSignal software has the ability to name potential waves as they are happening in real time … it is not always correct but it can flag potential wave structures.

Note that eSignal had wave 3 labeled and if you look closely, you will see two blue "-4-" notations.  eSignal places these automatically based on its algorithms … I like to draw my own wave 4 targets based on a variety of different things.  Here I used a simple ABC projection tool to get to my $133.95ish target.

AAPL_Jan20, 2011_Wave4
So, here was a case of having an under performing stock, making a wave 4 retracement, and at the expected area ($333.95ish 100% wave-4 target) it was making a potential ending wedge pattern with declining momentum.

I may be a little slow, but to me that is a "green light special" … no guarantees, but your edge here is undeniable.  So the plan is to play the break of the wave 4 supporting trend line.

While I am waiting for the set-up signal to trigger, I do the same old things … I look at internals to confirm the potential of a trade, I look at higher time frames to confirm the direction of the higher time frame trend, and I look at possible resistance areas for trade targets.  I also draw the MOB ("Make or Break" …. an eSignal software feature) to see how big of potential the trade has.

Before I post that chart that shows the short signal actually being triggered I wanted to again warn people about being patient and waiting for that signal confirmation … remember it often does not pay to anticipate the signal to happen before it actually happens.  This is especially true with a stock like AAPL.  AAPL's market maker is a slippery little pig and it seems his only job is to set-up patterns and then "fail" them, thereby catching the most number of investors as possible on the wrong side of the trade.  If you have the right trade in your sights, be patient and trust your analysis.

So here is the chart I posted just after AAPL signaled to get short (this was a 10-min chart so I could include more time)  …

AAPL_Jan21, 2011_Wedge2

Again, if you look closely, you would see that AAPL broke its wedge on the previous 5-min candle … an aggressive trader could have gone short on that break, but it is my experience with AAPL that these smaller patterns often fail.  So conservative investors are better off waiting for the real/bigger pattern to signal … that would happen on the break of the trend line support at $332.70.

Couple things to also note here … firstly the break of the wedge also saw AAPL break below its 20/50 ema's … that is further evidence of a bearish posture for AAPL.  As well, the triggering of the wave 4 trend line break would have seen AAPL turn negative for the day …  a very nice "positive-to-negative" price pattern that would be sure to attract further sellers.

So we get short on the trend line break at $332.70 … where is our stop?  Again it depends on your aggression level.  An aggressive trader wants a big stop so he can stay with a trade as long as possible while it fluctuates … he or she would place a stop above the upper trend line of the wedge … the high of the last candle in the wedge was $334.10 … so give yourself say $0.10 and place your stop at $334.20 (mental or hard-wired).

A conservative investor wants to limit the potential downside of a trade so they will have a tighter stop (and get stopped out of trades more frequently).  The high of the bearish candle that breaks the trend line was at $333.23 … this was also just below the 20/50 ema's.  A stop just above the candle at say $333.40 would be ok … above the signal candle and just above the moving averages.

Now with a stock as tricky as AAPL I will keep my "wave 5" short front and center and just focus on this stock for the time being.  So what are we looking for … well ideally, we are looking for AAPL to get down to that $329 target level.  However, man's best laid out plans often fail, so we have to be on top of this greasy pig.

The following chart is the 5-min chart right after the break of the trend support …

AAPL_Jan21, 2011_Trade1

So what do I do when I get short a stock … we'll you "look to your left" and try and see where possible areas of support could come into play.  I've drawn red-dashed support lines at previous swing prices here … $330.72 and  $330.12.  The low of this trigger candle was $331.36, so we should expect some follow-through.  Note the momentum measurement on the trigger candle … it is even with the previous low.  It is still pointing down so that is another positive for the potential of this trade.  If it had made a higher low then I would say that the potential for this trade was not great and I would take any profit and book-it and then wait for a better set-up in AAPL or another stock/ETF.

So the key to making money short is to have a good set-up, a good stop and then patience!! The following chart shows the consolidation/retracement effort you often see after a stock triggers short.

AAPL_Jan21, 2011_Trade02

So holding AAPL short here, the above price action is about the best possible scenario … this clearly shows us that AAPL remains weak, and it indicates to us that once it breaks the lower horizontal support line (red-dashed) we can expect further down side.  $331 was the bottom support here compared to prior support $330.72 and $330.12.  Being so close and showing a classic set-up to push lower makes me think here that $330.72 won't matter … $330.12 or even $330 round number is probably the next test.  So thinking that the next push is probably for at least $1.00, you want to add to your short on the break.  TAKE ADVANTAGE OF YOUR A-1 SET-UPS!! You are $1.00 above the next logical support price and $2.00 from your MOB target in a trade that shows you that it is a high-probability winner.  Enjoy!!!

AAPL_Jan21, 2011_Trade03

So you should have added to your short here at the trigger … now where should your entire stop be??  Again it depends on how aggressive you are as a trader.  An aggressive trader would most likely have his or her stop above the 20ema or even the traditional "line in the sand" marker the 50ema … $332 or 332.75.  To me that is too high since it doesn't lock in profits for your first trade.  I would place mine more where a conservative trader would most likely place it … just above the top horizontal red-dashed resistance line for the consolidation pattern … around $331.90.  This locks in $0.80 of profit on your core short from the first trade and risks $0.90 on your add-on.  Again it all depends on what type of trader you are.

AAPL_Jan21, 2011_Trade04

So what happens at the next support/target area … AAPL bounces just as it should.  Chill-out here guys … we are nija traders … we plan ahead for our enemy's next move.  We targeted the next support so we expect some type of bounce.  We are happy with our stop and so we just monitor the action!!

Note how we now have our first divergence in our momentum indicator … a higher low.  Again for those of you that have read most of my posts, you will know that a divergence is not a trigger … don't cover your short and go long … it is just your first warning to make sure you pay attention.  Make sure you are happy with your stops and monitor the action for a real signal to cover and possibly flip to go long.

Also note that the bounce pushed into the previous consolidation pattern but that the 5-min candle could not close in the range … that price area was "rejected".  That is the type of action that makes us feel better about our short.  In fact the high of this candle did not break the $331.25 high of our initial signal/trigger candle … again that is a good sign.

AAPL_Jan21, 2011_Trade05

So we get rewarded for our patience … AAPL shows it is still weak enough to push to new lows.  However, our Spidey senses are starting to tingle … note the lower leg on the candle and add to that the fact that the momentum indicator is clearly off its lows even though price is at a new LOD.

So here now with the price action and internals, it wouldn't matter if I was an aggressive or conservative investor … I would tighten my stops.  An aggressive investor should use the high of this break candle ($330.61) … stop at say $330.75.  Conservative investors would use the previous low swing ($330.17) … stop at say $330.30.

Also, I have not mentioned that the time of day right here is just before 12pm eastern … lunch time in the east.  Trends often end or at the least pause quite frequently around 12 noon eastern.  This is another thing you have to keep in mind as traders when you have trades on.

 

AAPL_Jan21, 2011_Trade06

So here is the following action after our warnings … the conservative trader would have been stopped out two candles later and the aggressive trader seven candles later.

How did the trade work … it was a great example of a well planned out short trade … low stress if we wait for our triggers to ignite.  The conservative trader made $332.70-$330.30 = $2.40 on his first trade and $331.00-$330.30=$0.70 on his add-on.  The aggressive trader made $333.50-$330.75=$2.75 on his first trade and $331.60-$330.75=$0.85 on his add-on (note aggressive traders will short as near to the top of the consolidation pattern as possible once they recognize the pattern … I assumed $331.60).

So now that we have covered our short, was it time to go long AAPL?

AAPL_Jan21, 2011_Trade07

An aggressive trader may have actually flipped long on the break of the 5-min trend line.  As most readers know I like to wait for the retest of the low and the subsequent trigger … so we wait!

AAPL_Jan21, 2011_Trade08

 

Again this illustrates the differences between being an aggressive trader and a conservative trader. The aggressive trader would most likely got stopped at just below the LOD ($329.40) … most likely around $329.25 for a loss of at least $0.75/share depending when he entered the trend line break. A conservative investor just sits back and wishes he/she was still short … not really but they remain unemotional and looking to see if AAPL will set up a tradeable reversal.

Notice the "hammer" candle … these are classic reversal candles. Again traders can go long on the break of the high of this candle ($328.50).  In this case, I would suggest that only aggressive investors do that … see the previous seven candles … they are all red! Once you have 4 candles in one direction that is tricky/dangerous to go against  the trend with only one reversal signal.  I prefer to wait for a second trigger/signal.

AAPL_Jan21, 2011_Trade09

Again to the earlier point about AAPL being a slippery pig … see how the candle following the hammer broke the high by 7c?  The market maker got aggressive traders looking for a reversal long on the break of the 50c high, only to flush them out as their stops would have been below the low of that hammer candle ($327.86) … probably at $327.75.

Conservative traders' Spidey sense would have started to tingle shortly after that however.  See the long-legged doji candle at 1:10pm followed by a wider-range body positive candle next to it?  That should have given you the second signal to at least plan a long trade.  A break of the red dashed horizontal line at the high of the failed hammer would to me be a trigger worth trying ($328.50).  Stops would be as marked … conservative traders at the low of the first up candle after the long-legged doji ($327.89), and aggressive investors would have their stop at the LOD underneath the doji ($327.32).

AAPL_Jan21, 2011_Trade10

Couple of points here … conservative traders would have been stopped out on the next candle after being triggered long.  Not all trades are going to work even if you plan ahead.  Aggressive traders would have still been alive with their stop below the LOD.

AAPL_Jan21, 2011_Trade11

So as conservative traders what do you do?  Run and hide?  No way … the next 5-min candle actually bounced right back up near the magical $328.50 level (high was $328.48) … then we had several smaller candles that were mostly doji's … this again is a positive sign for a possible reversal.  Price continued to grind towards the 20ema and the RSI(14) indicator showed increasing strength.

Here is where I posted a 30-min chart on Friday … here is that chart:

AAPL_Jan21, 2011_Wedge3
 

So, here we have an ascending wedge in a down trend right on the cusp of breaking the 20ema on the 5-min chart.  As well on the 30-min chart we were on the cusp of breaking a down trend line and making the completing higher low in a possible 3-push pattern.  What more does a trader need?  I didn't need anymore as I went long here.

AAPL_Jan21, 2011_Trade12

Beautiful push …. right up to the 50ema (the "line in the sand") test.  Now again, it is to be expected that AAPL pause here at the 50ema.  With the 30-min chart indicating a higher time frame move higher, the odds of a failure are low.  Also flashing positively were the existance of the two strong "Igniting Candles", along with the break to new highs in the momentum indicator.

AAPL_Jan21, 2011_Trade13

Shoulda Woulda Coulda … why didn't AAPL bust the 50ema with traders caught left behind chasing?  That is what would normally happen … instead we get a roll-over in momentum and a doji reversal candle.

I raised my stop to just under the 50ema here but conservative investors could have used the bottom/low of that doji candle as their stop ($329.89) … I used $329.80.

So what do you think is going to happen?  One of my favorite sayings is "if the market doesn't do what it is supposed to do, then expect to get a strong move in the opposite direction".

 

AAPL_Jan21, 2011_Trade14

The market sold har into the close ending near the LOD.  Take a look at the volume ramp up into the close as price collapses.

AAPL_Jan21, 2011_Trade15
Again, I know this was a long blog but I think it provided lots of educational learnings points.  Be sure to check out the weekly newsletter tomorrow as I go through a higher time-frame analysis of AAPL

Cheers … Leaf_West

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