AAPL When Momentum Fails

AAPL Apple Computer 10 yr w chart RSI MACD DMI

AAPL Apple Computer 10 yr w chart RSI MACD DMI

Since I worked a long time at Apple, I “have baggage” about it. For that reason, I tend to not trade it. My “view” is a bit too easily swayed by that baggage into an emotional response.

But this particular chart is a good example of what happens in “momentum stocks” when momentum fails.

Often there is that spectacular spike up at the end. A quasi-parabolic pull into a steep climb. Then the mountain peak ( a K2 moment) and the plunge.

Why? Because, IMHO, that’s how the emotional roller coaster works. Folks get worked up into an emotional positive frenzy, expectations are rocking and the sky is the limit. Yet no company can put out “110%” forever. Eventually the reality that 100% is a hard lid sinks in, the blush fades, the bloom is off the rose, and expectations ‘flip’ to 90% or even 80%. 1/5 to 1/3 of the value can evaporate in a heartbeat. (or palpitation).

How long will it last?

How long can people be disappointed and grumpy?

BTW, this is part of why I don’t get excited about “Momentum Stocks” and don’t talk much about the “Momentum Trades”. Because the ARE trades; yet most folks want to treat them like investments. Buy that rising AAPL stock, put it in the drawer and then retire in a few years. Works great if you bought it before the momentum run, not so great once everyone is talking about that hot stock with The Big Mo… as that’s just about the time the parabolic ‘flush’ starts.

To swap sides AT that peak is hard for most folks, so the strategy that works best, hop on the Mo and Flip at the top; is something most folks just can’t do. I’s a Mark Cuban style.

OK, some things to note.

That prior ‘bubble and drop’ took about 2 years to finish the ‘flat at the bottom’ and start the next run. Mark you calender, you likely have a ‘play’ coming in 2014 / early 2015. (Or shorts on whipsaws in between – we could easily have a 2nd peak / Dead Cat Bounce that could be traded up, then shorted again.)

Notice that both of those moments had a ‘ramp’ of steep rises leading into them. That’s a common feature. 3 years of ‘stair steps up’ with months of flats and rises on earnings reports / surprises or big news. Then one year of parabolic “blow off top”, round over the peak, and 2 years down. Just classic.

The plunge tends to end when RSI is near 20, then it makes a 20 to near 80 transition, and enters a ‘strong bull’ pattern of 50 / 80 oscillations. Buy the 50 touch, sell the ‘near-80’.

MACD above zero is good, below zero is during the crashes, but the crossover at the bottom of the crash is a clear buy time. At the peak, MACD calls an exit a bit soon, and folks can give up on it then. IF you ‘trade back in’, only do it with 1/2 a position size. Be ready to exit fast.

DMI is harder to use on momentum stocks. It’s excessively “blue on top” and the lag time in it tends to leave you in the “peak” a bit long; while at the same time those long steady growth phases get a weakening ‘strength’ indication from the ADX / DMI. The “steady fast rise” interpreted as “not accelerating fast”. That’s why it’s important to look at the shape of the price and SMA lines too. Is ADX / DMI ‘fading’ in a steady climb of prices? That’s more an artifact of how the calculation is done…

What About Now?

Apple must “change the world” every 5 years or so to stay vital. Whatever it makes, cool and ‘special’ as it might be, can be “knocked off” to a “good enough” degree at lower prices in that time. I’ve been through several of those cycles. (That’s my ‘baggage’). THE big question is “What is on the drawing board?” (and what will be killed for internal political reasons…)

Apple isn’t a manufacturing company. It’s not a distribution company. Those are done by others. Apple makes a new ‘cool thing’ and then rolls out a load of it to the Early Adopter and Beautiful People crowd. No cool thing? The Big Mo fades. NEXT!

So Steve Jobs was the King Of Cool. What isn’t known is “Can someone else do that too?”. They tried a couple of times (with Mr. Soda Salesman and Herr Spindler and “Spindler’s List” – the layoff list…). My general concern is that The Board has not shown themselves very good at picking executives. Only ‘recovering’ when Jobs came back and they admitted that firing him was a mistake.

Yet there are a lot of good and bright folks at Apple, and they have an ‘ecology’ of interworking products now; so I’d not expect them to evaporate any time soon. Will they transition to a staid old Consumer Staple? Or ‘change the world’ again? Nobody knows. The last couple of times they tried the ‘transition to staid’ nearly killed the company.

Personally, I’d go for ‘change the world’. But I’m not on the board. The kind of person who is the King Of Cool and out to “change the world” does not appeal to folks who spend their days on major corporate boards, sucking their own exhaust and preening for each other. Those are not folks who are ‘out in front of the curve’ with no exhaust in front of them nor the kind of person who says “F-off and die, asshole, this is cool and I’ll bet the company on it.” So they can’t hire a Steve Jobs. (That’s why Silicon Valley has so many ‘start ups’. It’s simply a social requirement to start fresh if you want to tip over old fruit carts and embrace disruptive tech…)

But there will be changes over the next few years. We will see if Tim Cook “has the right stuff” or not. The next product is likely to be a strong indication. The first “post Jobs” cool stuff will matter a great deal. We’ll see.

Until that time, let the charts be your guide. They reflect the decisions of millions of folks world wide and the charts have all those buys and sells in them. Remember “It’s not about you, it’s about all of them” and the charts tell you what they are doing.

For now, price is under the SMA stack, RSI is still falling and has not had “Near 20 then higher lows”, DMI is ‘red on top’, and MACD is way below zero and not with a crossover upside. All that is still looking at more drop to come. Price is presently pretty far from the SMA stack, so those two will reconverge, likely in a ‘counter trend rally’ back to the SMA lines. Yet that prior ‘bubble and drop’ had a ‘go flat’ at about the same point where the “parabolic lift off” started. We are now at about that point on the present chart. (But without the Jobs Legacy products yet to release…) It is possible that we just have a ‘go flat’ out of this as well. Look at the prior peak/drop/recovery. MACD goes ‘blue on top’ and heads up, the black portion of MACD ‘difference’ goes positive, a bit later DMI goes ‘blue on top’. RSI gets back toward the midline. If AAPL makes a good recovery with new “cool” and products that have “Wow” in them, that’s what we ought to see, and then there ought to be a few years of ‘new Big Mo’. If the cool is gone, we’ll have a long series of “wobble sideways” and “dipping down” with sporadic Dead Cat Bounces as the stock price aligns with earnings and dividends like a soap company.

If you want to trade or invest in Big Mo and Momentum Stocks, print this chart out and hang it on your wall. ALWAYS be on the alert for that parabolic rise and the “peak and plop” that follows. THAT is the risk in Momentum Trading. IFF the “run” has 2 or 3 years on it, that’s more likely the wrong time to get in than the right time. Right after the “bubble and plop”, it’s a sideways-down wobble. Lots of introspection. Sometimes a swap of CEOs (rarely does the board get changed…) Then a new run can start. That’s the time to start the play, at that new run. When everyone is ‘hearing the buzz’, and it’s gone parabolic, get out. Prepare to short.

Hard to do? Certainly.

That’s why I don’t do much with Momentum Stocks most of the time. Sometimes, yes, but not often. The times I ‘do something’ tend to be during that ‘couple of year’ chunk of ‘trending’ before the ‘bubble and plop’. Once I see the parabolic liftoff, I’m usually scaling out. The volatility rises then, so buying ‘protective puts’ is a less effective strategy. It is rising so fast that selling covered calls is hard too (though better than outright selling). It’s a decent time to use a ‘trailing stop loss’.

I’ve not been able to “flip to a short” at the top, mostly from just not being practiced at any shorting. I tend to use options for that, and do it in a tepid way. That’s a failure on my part, but one I’m “working on”.

OK, the wrap up:

Computer sales are down, hardware is more generic, Apple is one of the better of the folks making Cool Stuff that’s hard to poach, but Samsung is “good enough” for most folks. They need a new “change the world” strategy or they will become a Dell or HP (or DEC or Tandem or Commodore or… ) So I wish the folks well at Apple, and hope Cook can find his Cool.

For now, the bubble has ended for this cycle. Time to move on for a year or two and let the ‘bottom’ develop.

Update

Here’s a 2 year daily tick mark chart. I’ve used a longer SMA stack interval than usual here. 50, 100, 150 day lines. Why? Apple is fairly volatile, so they move further on return to SMA moments and need a longer ‘gap’ to avoid false penetration alerts. It makes it more ‘clear’ when the trend is changed.

AAPL 1 yr daily

AAPL 1 yr daily

Here you can see how the ‘parabolic’ lift off was a bit stronger than most of the prior moves. At the point where the price plunges through the SMA stack, it’s all over. That was the exit. MACD goes below zero then too (and stays there) and RSI transitions to a ‘midline – low -midline -low’ oscillator. DMI on this time scale works better, and has gone to clearly “red on top”. Pretty easy to read, really.

That, btw, is also part of why I will say when things are looking “toppy” to “move to a faster chart”. During a long run up, you want to have the ‘hang in there’ stability of a slower chart. As the top begins to form, you want to be getting out on that faster chart, not waiting 4 months for the slower longer chart. The only really ‘bad thing’ about that is the tendency to get flipped out on a first wobble. So look at April / May of a year ago (middle of the chart). That would have had you trade out early. Not really a bad thing for an investor who had been in a long time. Yet “sellers remorse” is likely during that next run up to the final peak. IFF you have swapped attitude over to ‘faster trades’, it’s not a problem. Sell at that last April MACD plunge / DMI ‘red on top’ / RSI ‘near 80 and lower highs’ moment. Trade back in mid-June for that next ‘bit at the Apple’ as MACD goes positive, RSI starts a rise and DMI goes ‘blue on top’ too. Just don’t “marry the trade”. You had one whack upside the head, it’s time to be MORE flighty, not think “don’t want to be flipped out again”… That’s the shift to a trader mind set. It’s not a bad thing to have gone out-in-out again. It’s a good thing…

That Aug / Sept RSI near 80 ‘sets the trigger’ and the DMI ‘blue on top’ has an inflection in the curve and in ADX with plenty of time to put a stop loss order in place. Then either the stop loss or the MACD swap to red on top will exit the trade.

That’s the technical implementation of an exit at / near the top of a parabolic lift out of a long trend in a Big Mo stock.

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About E.M.Smith

A technical managerial sort interested in things from Stonehenge to computer science. My present "hot buttons' are the mythology of Climate Change and ancient metrology; but things change...
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6 Responses to AAPL When Momentum Fails

  1. BobN says:

    What always amazes me is the different tone put out by analysts depending on if the stock is rising or falling. You could take the same quarterly report and get two different spins. When its going up they take the good and talk that up, but when the trend line breaks they will take an identical report, but jump on the negative. Once I hear the analysts change their tone its get out time.

    When Jobs died that chatter was can they keep going with out him, I knew they were looking to start taking it down, but its hard to kill a good momentum up stock. When it broke 560 I bought a fist full of puts. It will not go back to the old low so now I’m trying to decide the exit point.

    I always view stocks trending Up as investments and stock heading down as trades. It is rare for me to stay in an investment over 2 years. I keep looking for stock that trades a range, I have had incredible luck selling at the peak, buying at the bottom with a few extra shares I made from the peak. If you sell covered calls at the top and sell puts at the bottom you can accelerate the stock accumulation. I wish there was a search for such stocks.

  2. E.M.Smith says:

    @BobN:

    I call them “sideways rollers”. You can do a search for low momentum (in either direction) stocks and find them. I had a method for that once… maybe I’ll re-create it ;-)

    Yeah, call it “Spin” or “The Story”. Fun to listen, worthless to use.

  3. Espen says:

    Good take on AAPL, IMHO. It might be instructive to look at a logarithmic version of that first chart, though – the current “slide” isn’t really very different from the 2006 slide, for instance, it just looks different in a linear chart.

  4. R. de Haan says:

    Interesting view:
    Six Fundemanetal Realities In An Age Of Deleveraging
    • Private Sector Deleveraging And Government Policy Responses
    • Rising Protectionism
    • Grand Disconnect Between Markets And Economy
    • Zeal For Yield
    • End Of Export Driven Economies
    • Equities Are Vulnerable
    http://www.zerohedge.com/news/2013-05-03/gary-shilling-six-realities-age-deleveraging

    Perfectly fits Agenda 21 objectives

  5. Gail Combs says:

    R. de Haan, you might be interested in reading this article. As Trust Evaporates… comments on a Matt Taibbi article in Rolling Stone: Everything Is Rigged: The Biggest Price-Fixing Scandal Ever: The Illuminati were amateurs. The second huge financial scandal of the year reveals the real international conspiracy: There’s no price the big banks can’t fix – the markets are completely rigged by the big boys.

    Conspiracy theorists of the world, believers in the hidden hands of the Rothschilds and the Masons and the Illuminati, we skeptics owe you an apology. You were right. The players may be a little different, but your basic premise is correct: The world is a rigged game. We found this out in recent months, when a series of related corruption stories spilled out of the financial sector, suggesting the world’s largest banks may be fixing the prices of, well, just about everything….

    Someone needs to alert Lewandowsky that a leftist mag is conceding Conspiracy Theorists were RIGHT!

  6. E.M.Smith says:

    @Gail:

    It’s not a conspiracy theory if it is happening…

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