December 6, 2012 (11:00 am)
I did not expect such a strong reversal so quickly. This morning, we saw a low of $518. One hour later, we’re sitting at $548. A $30 move in an hour is not ordinary price action. I think this is the market rejecting a low $500’s valuation for Apple and saying that those price levels are completely unreasonable. There are two things I’d like to add to my earlier post.
Head & Shoulders Pattern
There’s a pretty sizable head and shoulders pattern that is now completely formed on Apple. This morning marked the fourth touch of the neckline, indicating a breakdown of the pattern is now possible. I’ve been watching CNBC, and they’ve paraded analyst after analyst to discuss the “Death Cross” and this head and shoulders potential. To completely contradict these analysts, I think these are both very bullish. Let’s start with the death cross. What this means is that the 50 day moving average is crossing below the 200 DMA. This is seen as bearish because the short-term action is weaker than the longer-term trends. In my view, this is all BS. what the moving averages look at is the historical price action. It tells you absolutely nothing about the future. It’s a great reason, though, for short sellers and bears to raid the stock. The short interest in Apple (which measures the number of shares that are short compared to the total shares outstanding) is at the highest level since March 2009 (the darkest hour of the financial crisis and inflection point when the massive market rally began). I prefer for more people to be short the shares, because when we do see it rally, they’ll have to cover their shorts and buy shares. It’s called short squeeze. Bring them on.
As for the head and shoulders, it essentially has the same effect. Market makers and big funds can perpetuate the fear surrounding the pattern, and take advantage of all those retail investors who sell in fear. It also sharply increases the number of short sellers. I think it’s another one of those “fake out” patterns, that shakes investors out of their shares and enables the bigger players to gobble them up. See below
Double Bottom Reversal
The sharp reversal this morning brings into play one of my favorite pattern. It’s one of my favorite’s because you see it happen so often, and they play out to fruition much more often than most other chart patterns. What this pattern is saying is this. Investors try to see how far the shares can fall during the first sell-off. Natural buyers step in at some point, when the valuation warrants it. This should happen on higher than average volume. After a rally, the bears try again. If the natural buyers again come in around the same levels, you see a re-test of the lows (creating either a higher low or a lower low). This should, again, happen on high volume. See the pattern below. Clear as day.
The price target is calculated as a measured move above the neckline (or below it in a double top pattern). So if the average bottom is $512 in this case, and the neckline is at $594, the measured move is $82. Add this to the neckline to get the target of $676. A reason I find this target so interesting is because it’s within 2% of a pretty significant long-term trend line that the shares have been forming since the beginning of the year. I think a touch of this line, which will be resistance since we’re coming from below it, makes a lot of sense. We’ll see where this take us.
For now, this session couldn’t have gone any better. Without the strong sell-off this morning, the double bottom reversal likely wouldn’t have been as clear. And without the subsequent rally off the lows, it would have been less clear that buyers would come in even at lower prices.