Stocks to Watch (Part 5)


January 28, 2013 (11:30 am)

We’re updating these later than we hoped. We spent a lot of time over the past few days refining our site and were distracted from the underlying charts. Anyways… happy to be back to the fun stuff. Here are the charts we’re currently watching.

Apple. Whew. What a week for Apple. We drew out the chart below during the “parabolic” run in March of 2012, just as the shares were climbing up the (green) “bump” line. The chart illustrates a typical Bump and Run pattern. It was just something we were keeping an eye on, and it’s hard to believe that it came through to fruition. What happens is this. A stock is steadily climbing up the (blue) “run” line, before experiencing a dramatic rally (the bump). After spending some time climbing up the green bump line, they shares fall back to the blue run line. Subsequently, you’ll most often see shares retrace the entire rally and fall back to where they initially began the parabolic aspect of the rally. It can be argued that the bump began either before or after the post-earnings gap in late January – so either $425 or $440. The shares have since found support at that $440 level.

AAPL

Apple’s Falling Wedge. Continuing on with another Apple chart, we’re taking another look at the falling wedge that we outlined numerous times in the past. We hoped – and expected – that an earnings bump would break the shares to the upside. Clearly, that was wrong. We experienced a dramatic breakdown. From a strictly fundamental point of view, the shares are deeply undervalued here in our view. 10x LTM earnings is simply too low. Even if growth was completely done for Apple, we should see it trade more in line with Microsoft, which is trading at 14x LTM earnings. So with that, it wouldn’t be shocking to see the recent drama in the price action represent a false breakdown of the falling wedge. When we look back, the current $450 level may be akin to the $644 level in late March 2012 – simply a momentum trade without fundamental backing. With sentiment in the toilet and every voice on CNBC calling for the low $400’s, $300’s and some even expecting $200’s, now may be the right time to get back in (for those who aren’t already). Shares can become overextended to both the upside and the downside. We believe it has simply moved too far too fast to the downside. A relief rally should take hold, which may give fundamental buyers more comfort to get back in.

AAPL Falling Wedge

Amazon. We went short Amazon on Friday afternoon, as it hit the top trend line on overbought conditions. There should be a pull back and consolidation here.

AMZN

Broadcom. BRCM is sitting at the bottom trend line of a rising wedge, after we saw a false breakout to the upside. We expect to enter a bearish position on a breakdown.

BRCM

Berkshire Hathaway. We entered a bearish position in BRK.B a couple of weeks ago, and it has continued to rise. We’ve highlighted “overbought” Chi-Osc conditions over the past year. 7 of the last 10 times we saw these levels has led to a sell-off. Two of the remaining three instances saw at least consolidation, if not a slight pull back. The only time it continued higher was when we took a bearish position. The sell signal was triggered again late last week, so we feel comfortable holding our position. The shares gapped well above their upper Bollinger Band two weeks ago and hasn’t even consolidated since then. Further, over the last three days, we’ve seen an “evening star” form – a bearish topping pattern. It forms when a large white candlestick is followed by a black candle (that begins at a higher price, but closes below the top of the previous candle). It is followed by a red day, verifying the pattern.

BRKB

Gold ETF. GLD formed an enormous falling wedge over the past three months. We entered a bullish position when the shares broke out. A bull flag we had hopes would push the shares higher failed, and we’re again re-testing the upper trend line of the wedge. We’re still comfortable holding our position here and expect higher prices ahead.

GLD

Google. GOOG has formed a number of wedges over the past few days. First, there’s a three month rising wedge (blue). Second, the shares formed a bullish falling wedge as it broke out of the larger one. It gapped up back into the larger wedge and is now forming another bearish rising wedge. And it’s doing so with negative divergence. We entered a bearish position on Friday afternoon as it touched the top trend line.

GOOG

Netflix. Another doozy. We went short NFLX as it touched the top trend line of a multi-month rising wedge and entered overbought conditions. It has since surged higher. We took another bearish position on Friday afternoon. We believe it will fill at least some of the enormous gap that remains open, but are watching closely.

NFLX

Nike. We entered a NKE long position as it slowly broke out of an ascending triangle. On Friday, the shares hit our $55.50 price target, so we sold our position.

NKE

Research in Motion. Shares of RIMM leaped out of an ascending triangle over the past two weeks. As it surged past our expected price target of $14.50, we entered a bearish position with the expectation that it would retrace a portion of its rally. The shares, instead, continued climbing. RIMM shares trade primarily on momentum. We expect that this move will be done shortly and momentum traders will bring shares the other way. RIMM introduces its new operating system on Wednesday. We’ll wait to see what happens there. With the shares up 100% in the past three months, expectations are through the roof. We don’t expect these prices to hold.

RIMM