Why you should avoid this (very popular) stock like the plague
Tuesday, January 29, 2008 | Chris RoweRating:
I look at both the fundamental and the technical picture when considering stocks to take either bullish or bearish positions in. Today we'll talk technical analysis to which I tend to attribute more weight since most of my positions are based on the intermediate trend.Last week Apple (Symbol AAPL) reported their fiscal first quarter results that CEO Steve Jobs called their "best quarter ever with the highest revenue and earnings in Apple’s history".
Quoted from Apple's website: They posted "revenue of $9.6 billion and net quarterly profit of $1.58 billion, or $1.76 per diluted share. These results compare to revenue of $7.1 billion and net quarterly profit of $1 billion, or $1.14 per diluted share, in the year-ago quarter. Gross margin was 34.7 percent, up from 31.2 percent in the year-ago quarter. International sales accounted for 45 percent of the quarter’s revenue."
This is awesome... for Apple! Listen to this:
“Apple’s revenue grew 35 percent year-over-year to $9.6 billion, an increase of almost $2.5 billion over the previous December quarter’s record-breaking results.”
SUPER!!!
What does that mean to people who want to buy the stock at the right time? Nothing. We were hearing great news about Apple in late October when I wrote the article titled "3 Winning Stocks... To Avoid!" Click here to read it.
Apple traded down almost 20% since then.
There are technical reasons to wait for the right time to buy the stock just as there were when I wrote that article. Let's first look at the 2 year daily chart below. I drew the long-term trend line from the July 2006 low. This is the trend line that Apple bulls would have liked to have seen the stock find some support. The fact that it didn't find that support was a huge negative, and, because the trend line was broken, many institutions won't touch this stock until it proves that it can break some resistance levels. (Hint: the stock will most likely run into resistance at the same blue line below.
Let's zoom in to the 1-year chart. One big reason to avoid buying this stock near 200 was the price volume action leading up to that point. You can see that as the stock made the last run the volume decreased significantly as the stock's price increased. This is a major sign of weakness.
I drew (in red) an intermediate trend line which was not considered to be as potent as the long-term trend line (above in blue, and below in green) but it was still an important potential support level. Obviously it was broken (around $178.00) and as you can see, after it was broken, it acted as resistance in the following week (right around the same time that we saw the MACD sell signal which is circled in red). If Apple was ready to start flexing its muscles, it should have done so at the (green) long-term trend line which happened to also coincide with the horizontal support level of $150.00 which was established in mid-November, but that didn't happen.
So the stock is looking weak here. That doesn't mean it can't trade higher however. That's a completely different story. Just because a stock should trade higher is NOT a reason to buy it. Please re-read that last sentence because it's not a typo. One of the biggest (most expensive) mistakes people make is buying ONLY because they think a stock should go up. But that's definitely not the right way to think about trading stocks.
You want to only buy stocks that are showing strength, and are already in an up trend. Let's look at the next chart which is a 6-month daily chart. When Apple broke all of these major support levels, the stock "gapped" down creating what is known in eastern technical analysis as a "window". This is a continuation pattern and since the trend is down, it's a hint that the down trend is more likely to continue than reverse higher. Typically a window will be "closed" as the stock tends to retrace that "gap" (highlighted in red). But that shaded area tends to act as resistance (in a downtrend).
If that window is closed (or the gap is filled) and the stock continues higher past $150.00 then it's a strong sign that you'll see a reversal higher and the down trend is broken. If that happens, the reversal sign is MUCH more potent if it happens with at least twice the average daily volume and the stock must close above $150.00 as opposed to just making the daily high above that level.
The stock may still move higher to close the window, and the typical 50% retracement of the recent 30 point drop would bring the stock up near $145.00 which would be a typical window closing. Don't chase it! I know it's tempting after watching it drop 70 points. It's just not a good buy until it proves it has the strength to charge higher again. Never buy a stock unless the odds weigh heavily in your favor. If you keep your standards high, you'll make lots of money in this market.
I'll keep you posted on this one!
The stock may still move higher to close the window, and the typical 50% retracement of the recent 30 point drop would bring the stock up near $145.00 which would be a typical window closing. Don't chase it! I know it's tempting after watching it drop 70 points. It's just not a good buy until it proves it has the strength to charge higher again. Never buy a stock unless the odds weigh heavily in your favor. If you keep your standards high, you'll make lots of money in this market.
I'll keep you posted on this one!
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“Profit from the Trend”
Chris Rowe
Chief Investment Officer
The Trend Rider
