September 25, 2013 (10:00 am)
A concept that we reviewed yesterday was that of Apple’s Bollinger Band (“BBand”) compression. In June 2013, Apple’s BBand compressed to levels rarely seen. The pattern looked very similar to one it formed in June 2011. Our original analysis can be seen here. We’ll lay out the charts and discuss our analysis below.
Note: We have an overview of Bollinger Bands in our “Investing 101” section.
Compression. In each of these cases, the BBands became extremely compressed with a width between $21 to $24. To give you a sense of how compressed that is, the BBands measure 2 standard deviations from the 20-day moving average. That means that the volatility leading up to that point became extraordinarily low. When we first noticed this anomaly, we hypothesized that the very low volatility was a “coiling” in the spring that would later pop.
Similarity. In each of the three charts above, you’ll notice a very similar overall pattern. Shares consolidate for many days at a certain level, leading to a very compressed Bollinger Band. Within 5-10 days of the most compressed point, the shares fall roughly 6-8% and drop below the lower Bollinger Band (often for multiple days). In the first two charts, after that initial 6-8% drop, we saw a 90-100 point rally in the ensuing six weeks.
Accumulation Strategy. We believe this initial action after the BBand compression is an accumulation strategy by the big funds and institutions. In other words, it’s a false breakdown. After shares of a stock trade in a tight range for multiple days, which many traders assume is congestion and where supply/demand is balanced, these traders place orders on either side of this range in order to participate in a future “breakout”. What they may not know, however, is that the tight trading range was actually an area of high accumulation for big funds. When the big funds have been unable to accumulate the desired amount while the market was in the tight accumulation range, they force shares down below the trading range (by quickly selling a small portion of stock previously accumulated) in order to trigger all those limit orders set by other traders. This allows them to accumulate all those stop loss or short sale orders on the way down, before reversing course.
We expect that shares of Apple are on an intermediate-term path to the mid-$500’s, based on the technical analysis provided on Monday. The recently established island bottom reversal may have simply been an accumulation method established by funds who weren’t able to purchase enough shares at the $500 level. While Apple can absolutely trade lower here, for those with longer-term investment horizons, it may be worth a shot.