Technicals Analysis: Where it Fits in When Investing


December 2, 2012 (10:00 pm)

Apple began its rally eight trading days ago. In that time, it’s regained $85 points lost during the correction. At this pace, the shares would be at $700 during the second week of December (‘current track’ line below). Ideally for our current positions, the shares would hit $675 by the end of the year. If you follow the orange dotted line on the chart below, you’ll see that it’s much shallower than the current rebound. What that means is that we can have multiple pull-backs over the next 4 weeks and still easily retake that $675 price. In fact, the shares could pull back to $560 right now and still be in a position to hit $700 fairly easily by the end of the year.

Where Technicals Fit In

I focus a lot on technicals. But to be honest, there are other much more important factors to take into account before investing or taking on certain trades. The first thing you need to look at are what the big funds are doing. Are they long Apple shares and options? Are they accumulating shares, or are they in the profit release phase (or simply waiting it out)? Near the beginning of large trend changes, you can be confident the smart money is there. And they’re all in during those trend changes. So right now, we can be confident that the professionals are right here with us. Over the past couple of weeks, they bought near the bottom and are waiting to release their profits.

Each consolidation phase is essentially an accumulation area. You tend to see symmetrical triangles or other tight trading range at levels of resistance/support or after a significant rally. These are the points where retailers are selling to get out at breakeven (after a correction). And who’s there to pick up their shares? The pros and market makers are accumulating all those sell orders. Then during the next run, they release the profits.

So it’s important to know where the professionals are trading. The other obvious, and needless to say important, aspect is the fundamental story. Apple is heading into its most bullish season of the year. December begins on Monday, and we all know what 60%+ of the population wants for the Holidays. The iPhone 5 and iPad 4 are now well-supplied, the iPad mini is seeing enormous demand, and macs are still selling out quickly at retail stores. I don’t mean to spend very little time here, but the fundamental story is clearly still in tact.

Technical analysis comes after these other two factors. If big funds are positioning for a correction, don’t fight the trend. And if the fundamental story falls apart, the technicals will likely fail. But if these two forces are with you, the near-term picture can be dictated by technical analysis and can be helpful to find intermediate-term entry and exit points.

SPY Bullish Pennant

The SPY hit the green resistance line 5 times before finally breaking out. Typically, when a stock continues to hit a line of resistance or support, you’ll see it breach that level. And that’s exactly what happened here. Now, the SPY has formed a pretty well-defined bullish pennant. These tends to break to the upside after a rally, since they’re technically continuation patterns. While a lot of negativity is being felt around the fiscal cliff, the technicals are suggesting that the market will brush off these fears.

NYMO

An important indicator for the broader markets is the NYSE McClellan Oscillator ($NYMO). This indicator measures the number of advancing stocks in the NYSE less the number of declining stocks. A breach of the -80 level has historically preceded a strong rally. It means that the sell-off is coming to an end and that it is overdone. See the chart below, which we mentioned on Twitter in mid-November. Each of the blue vertical lines indicate that the $NYMO has breached that important -80 level.

This indicator has a very strong track record of preceding enormous rallies. The most recent signal rang while the SPY was at $135. Just days later, it’s sitting above $142. This will be an important indicator going forward.