Bollinger Bands


Avoid Apple Into Earnings?

October 26, 2013 (3:30 pm)

Heading into earnings on Monday afternoon, we wanted to provide an update on Apple’s recent stock price action. Since early July, the stock has gained almost $140 points – $130 of which have come since just the last earnings announcement.

COMPARISON TO JULY-SEPT 2011. We’ve posted the following chart a number of times. We first noticed a few similarities back in late September (A Complete Look at Apple and the Markets). The recent action has followed an eerily similar set of price movements.

During both the July-Sept 2011 and July-Oct 2013 patterns, it all starts with a meteoric rise from Point (1) to Point (4), with consolidation along the 50DMA at Points (2) and (3) along the way. After hitting Point (4), the shares retraced approximately 50% of their gains back down to Point (5) at the 50DMA. Consolidation for a few weeks followed, as the shares slowly rode up the 50 DMA line before exploding past their previous high to Point (7). We find ourselves at Point (7) right now – just as we head into 4Q13 earnings.

AAPL Comp

It’s no coincidence that other technical indicators, namely the MACD and RSI, share very similar attributes between those two periods in 2011 and 2013 as well. At the initial low Point (1) the MACD makes a bullish flip, and at the Point (4) high, it flips to bearish (at roughly the same levels). After the pullback, the MACD consolidates for a number of weeks. Take a look at the RSI in that same chart. Notice how similar the each point is between the 2011 and 2013 time frames.

NEGATIVE DIVERGENCE. Significantly, the RSI is also painting an extremely bearish picture for the near term. It has created multi-month negative divergence – forming a lower high on RSI while prices have risen (red lines in the chart below). This is a sign that momentum has weakened and portends a pullback.

AAPL BB CMF

At the bottom of this chart, you’ll see the Chaiken Money Flow – which has risen substantially in the past couple of weeks. Money is flowing into the name (which shouldn’t be surprising given its rally). However, note that it also rose to this same level (Point 7) during the peak of the 2011 rally.

DOUBLE BOTTOM. As we’ve shown many times, $545 is the target level to be reached from the double bottom breakout. We’ve reached within 10 points of that level.

AAPL DB

CUP & HANDLE. The current Apple chart forms a very well-defined cup and handle pattern. This is a longer-term chart that we’ll continue to keep a close eye on.

AAPL CH

CONCLUSION. So how do we piece this all together? We expect to see a near-term pullback in shares of Apple due to:

  • Bearish RSI negative divergence
  • Reaching very near the double bottom target
  • Spending numerous days above the upper Bollinger Band
  • Comparison to 2011
  • Shares already up $130 from the previous earnings announcement

That last point is an important one to keep in mind. Shares of Apple have rallied from $400 to $530 since the July earnings report. When Apple see a significant rally into earnings, we tend to see a decline either on or following the earnings report. All of those factors, together, gave us the confidence to largely exit our entire Apple stake heading into earnings (which we did on Friday). Maybe the shares gap up and continue rallying, against all historical norms. But we’re comfortable waiting for a better opportunity at this point.

LONGER-TERM THOUGHTS. There are really two scenarios here. Our current expectation is for a pullback in shares over the coming weeks. If this comes to fruition, we’d expect to see a major rally into the Holidays and through the first quarter of 2014. In other words, we’d expect the similarities to the 2011 pattern to continue. From a fundamental point of view, we currently expect 25% EPS growth year-over-year in fiscal 2014. That growth, along with weaker comps, a potential deal with China Mobile, stellar iPhone/iPad sales in the coming quarter, and the possibility for a new product category (none of which are included in our EPS estimates currently) should drive institutional interest in shares through 2014. That Cup and Handle target of $645 will be an important one to watch as we move forward… it could be hit sooner than many believe. But shares do need to consolidate/pullback first.

If, on the other hand, the shares spike on the earnings report and continue to run, we will have to reassess our view. Apple doesn’t historically move up or down slowly. It makes epic runs and falls, and largely consolidates in between. Therefore, if it continues to run, we’d expect it to experience a longer than usual period of consolidation during which we can trade the name.


A Complete Look at Apple and the Markets

Sunday, September 29, 2013 (5:30 pm)

We wanted to provide an updated outlook for both Apple and the broader markets. While our medium-term outlook remains fully in tact, we’re seeing a number of conflicting signals in the near-term.

APPLE OUTLOOK

APPLE: A REPEAT OF 2011? As we reviewed our charts, we came across a very similar price and technical pattern to the current price action. Look at the July-Sept time frame in 2011 versus 2013 below:

AAPL 2011 vs 2013

Let’s take a look at the similarities. The numbers refer to the points on the price chart within the purple boxes, while the letters refer to the RSI/MACD technical indicators.

  1. The bottom. Negative 5-10 MACD (a) and 25-30 RSI (A);
  2. Consolidation at 50 DMA;
  3. Consolidation at previous 6-month high price;
  4. Sharp rally to high price. 15-20 MACD (b) and 80-85 RSI (B);
  5. Sharp pullback to near 50 DMA and Point 3. 40 RSI (C);
  6. Rebound, which forms on a gap up. 55 RSI (D).

Now that we’ve looked at all the similarities between the two time periods… where do we go from here? Let’s look back to 2011. After the shares performed in an extremely similar manner to the current price action, the shares dropped to create a double bottom at the 50 DMA. In the current case, there is a lot of support in the $474-$476 range, with the 50 DMA, 10 DMA and long-term trend line all within that $2 range. Below that price, additional strong support rests at $465. After an initial drop, the shares saw a strong rally over the ensuing four weeks to create a new high print.

Conclusion: While the near-term presents some uncertainty, this is additional evidence pointing toward our longer-term bullish outlook for the shares.

APPLE: DESCENDING TRIANGLE. If there is near-term downside, it will likely come in the form of a breakdown from the descending triangle below. The 100% measured move is roughly $15 with a target near $465 – right at the point of very significant support that has formed with multiple touches over the past 10 months.

AAPL Triangle

The real disappointing aspect of this potential would be the invalidation of the island bottom reversal. The island reversal is a very bullish longer-term pattern if it remains in effect. It’s important to note here, though, that while descending triangles typically have a bearish tilt, all triangle formations (ascending, symmetrical, descending) are known as continuation patterns. Continuation, in this case, would be to the upside. On the other hand, this $465 target does seem to fit fairly well with the July-Aug 2011 comparison above.

Conclusion: The descending triangle, while technically bearish in bias, can also be viewed as a bullish continuation pattern. No real conclusion – we need to see which way it breaks.

APPLE: BULL FLAG. Another viewpoint of the current price action, looked at from the lens of a longer time frame, is that this could very well be a bull flag in the forming. A bull flag takes place after a significant rally, when the shares consolidate downward for a period of time before resuming their bullish climb. It is typically combined with declining volume throughout the pattern. We’re seeing that exact situation here: a downward consolidation after a strong rally that is taking place with dramatically declining volume. Furthermore, the MACD just turned bullish (which we’ll discuss more below).

Conclusion: The clear-cut bull flag on declining volume, in combination with the bullish MACD is a very bullish sign for near-term price action.

AAPL BF

APPLE: MACD TURNING BULLISH. Apple’s MACD has begun to turn up in the daily chart. We’ve indicated those instances in the past where the MACD has very clearly turned up (bullish) or down (bearish). We did not include those cases where it didn’t make a strong move. The MACD has been a fairly reliable indicator over the past year as to the near- to intermediate-term price action. Most of the buy signals (blue) have led to 50+ rallies in a short amount of time. Similarly, the sell signals (red) typically led to fairly strong pullbacks. This is an important one to keep an eye on.

AAPL MACD

Conclusion: Combined with the other technical indicators discussed, this is a bullish signal.

APPLE: DOUBLE BOTTOM BREAKOUT. Don’t lose track of this chart. The price action, in the intermediate-term should be viewed as bullish as long as Apple holds the $465 price level (double bottom breakout point).

AAPL Double Bottom

Conclusion: The $465 price point is clearly important here. Even if the shares break down from the descending triangle described above and hit the $465 trend line, we believe that price level will hold. While the near-term is cloudy, again, the longer-term should be viewed as bullish. If the bull flag scenario comes through to fruition, we believe the $515 level will be a magnet. If that level is exceed, $545 should likely come next before or around October earnings.

APPLE: CUP & HANDLE. As discussed last week, shares of Apple have created a much larger pattern known as the cup and handle. If Apple can take out the $515 level, the 100% measured move of this pattern is $640, which happens to be the high set last February and again re-tested (after the all-time high was put in) before last October’s earnings announcement.

Conclusion: To remain valid, the price should remain above the $465 level, and relatively quickly retrace back to the $515 neckline.

AAPL C&H

FINAL APPLE CONCLUSIONS. In the near-term (days and next couple of weeks), there are two factors working against Apple. One is the descending triangle and the other is the comparison to 2011. Both point to a test of the $465-$470 level (which, don’t forget, is only $10-$15 below the current price). However, it’s important to look at the contradictory bullish indicators. The bull flag with declining volume, the bullish turn in MACD, the triangle (yes it’s descending, but all triangles are continuation patterns), and the double bottom breakout. The path of least resistance, in our view, is up in the near-term.

In the longer-term, we have very high expectations that shares of Apple will provide strong returns due to the much larger chart patterns: double bottom breakout, which formed over five months, and the cup and handle, which formed over ten months.

BROADER MARKETS

SPY: SIGNIFICANT DIVERGENCE. As we mentioned last week, the SPY has formed significant negative divergence with BPSPX (the bullish percent index). It created a three-push pattern, with each successive high price occurring on a lower high in the BPSPX. We also saw the third push up occur on an extremely overbought NYMO. The last time we saw this formation was in July 2011. We saw a 25 point drop in the SPY within the next month.

SPY NYMO

SPY: SUPPORT & RESISTANCE. SPY has strong support at the $167.50 level, which coincides with the 50 DMA. We fully expect a test of this level in the coming days. The SPY has also formed a head and shoulders pattern. A strong break below the $169 support line equates to a breakdown in the H&S pattern, which has a $3.50 100% measured move target of $165.50.

The last time we posted this chart, the SPY was testing the $169 support level. We provided an expectation (blue dotted lines) that had the SPY re-testing the $170.25 level before pulling back to our near-term target of $167.50. That has come to fruition thus far.

SPY NT

INDU: NEGATIVE DIVERGENCE. The Dow Jones has also created negative divergence with its MACD. Below, you can see the last three times we’ve seen significant negative divergence, which lasted many months. Each led to a significant pullback in the markets. This is additional evidence that the broader market is setting up for a pullback this fall.

INDU Divergence

VIX: THE BOUNCE, AS EXPECTED. As we projected last week, the VIX bounced off its long-term support line. There is no clear direction in the VIX from here.

VIX

FINAL MARKET CONCLUSIONS. Taken as a whole, we expect a significant decline in the markets to take place in October or November. With the Fed continuing with its $85 billion monthly asset purchase, against all expectations, we expect the market to begin rationalizing this decision. The economy is in a weak state – weak enough that the Fed is unwilling to back off (even slightly) from its massive asset purchases. It’s interesting that all of these technical indicators are flashing “potential crash ahead” just as the government is set for a shutdown AND may be unable to avoid a national debt “default” (while it wouldn’t technically be a real default, in this market perception is reality).

Now, doesn’t this conflict with our outlook on Apple? While – we’ll be honest – it is hard to fathom the largest stock in the world could swim upstream while the market experiences a correction, we have seen the opposite occur for most of the year. With the stock at an extremely low PE multiple (almost half that of the broader markets – 12x vs 19x), we believe the downside is extremely limited, and investors may actually re-allocate capital from the broader markets to the name. It’s large cash position, low valuation and upcoming EPS resurgence will make this stock outperform during any correction.


Apple’s BBand Compression: An Accumulation Strategy

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.

JUNE 2011

AAPL June11

JUNE 2013

AAPL June13

SEPTEMBER 2013

AAPL Sept13

ANALYSIS

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.


A Review of Our June Expectations

September 24, 2013 (6:15 pm)

After writing a post on June 20 (see the post here), we took a three-month break from updating this site. We continued to provide charts to our Twitter followers, but largely strayed from the larger, more complex analysis that is impossible to conduct in 140 characters. So we wanted to review our last comprehensive analysis on Apple and the broader markets.

***FROM JUNE 20*** Heading into its WWDC, we laid out three charts with explanations as to why we believed shares of Apple would rise during and after the conference. The rising MACD and bounce off the 50DMA: wrong. The potential inverse head and shoulders: wrong. A bullish triangle on the weekly chart: wrong. Clearly, we were wrong on all fronts here, as the shares continued lower and reached as low as $408 this morning.

We believe the tide is turning, however. We’ll lay out a series of charts and historical comparisons as to why we remain bullish on the shares. Three28Capital does not recommend very near-term options plays – it’s simply gambling. But for those with an intermediate- to longer-term timeframe, we believe it’s a great opportunity to pick up shares or options in Apple at these levels. Here’s why:

1. Daily Chart: Bollinger Bands and RSI. The chart below is, in our opinion, the most powerful and meaningful of the charts we’ll explore. First, the daily RSI support (horizontal blue line) has been an extremely accurate indicator. The RSI is now sitting firmly at that support. Second, a meaningful drop (not just a few cents, but multiple dollars) below the lower Bollinger Band has proven to be a very useful data point. Shares of Apple have traded well below the lower Bollinger Band for the past three days. You can see the reaction to either of these “buy” indicators on the chart below. Notice that when both indicators flash “buy” at the same time (which is the case today), we’ve seen the following rallies:

  • Jun 2011: $90 (one month)
  • May 2012: $55 (two weeks)
  • Jan 2013: $50 (two weeks)
  • Mar 2013: $50 (three weeks)
  • Apr 2013: $90 (three weeks)

AAPL BBands RSI

***SEPTEMBER 24 UPDATE***: Here is what the chart looks like today. Clearly, for those with “an intermediate- to longer-term timeframe”, our $408 recommendation price was a fantastic time to buy.

AAPL BB Update

***FROM JUNE 20*** 2. Hourly Chart: RSI. Since the September top in shares of Apple, the green and red horizontal RSI lines below have acted as very accurate buy and sell indicators. Shares are now trading below that important 20 RSI level. We expect a retracement of this pull-back over the coming days and weeks.

AAPL Hourly

3. Bollinger Band Compression: A Historical Comparison. We’d classify this one under the “interesting” category (and not necessarily, but potentially, meaningful). The last time the Bollinger Bands were as compressed as they got in early June (which was a width of $22.50) was – coincidentally – in early June 2011… just two days apart between the years. What’s interesting is to compare the subsequent price action. In June 2011, with the BBand width at just $21, the shares dropped nearly 6% over the coming 7 trading days, with capitulation selling to a level well below the lower BBand.

Contrast that action to today (note that the chart below was as of yesterday’s close). With the shares trading as low as $408 today, that denotes a 6% drop over the past 7 trading days. And don’t forget the capitulation selling we’ve seen today to a level well below the lower BBand. After that capitulation in June 2011, there was a dramatic rally of 30% over the following four weeks.

BB Comparison

***SEPTEMBER 24 UPDATE*** See an updated chart of the aftermath of the Bollinger Band compression below. Although there was some remaining downside pressure, the shares bounced over $100 from our recommendation price over the following 7 weeks.

AAPL BB Compression Update

***FROM JUNE 20*** 4. QQQ (NASDAQ) Long-Term Support. Another important data point when analyzing Apple is to consider the NASDAQ index (QQQ). The chart below is extremely important. With this (what feels like) capitulatory selling, the QQQ saw quick and intense selling almost in a vertical decline. It stopped right at the long-term support level that had marked two previous (and important) peaks over the past year. That support firmly held, and the QQQ’s have since held above that support. This is meaningful price action, and we expect a retracement of the pull-back to begin shortly.

QQQ

***SEPTEMBER 24 UPDATE*** Our thesis proved 100% correct. The QQQ held exactly at the long-term support line and a full retracement quickly ensued. See below for the updated chart. The index has gained 13% since our call of an imminent bottom.

QQQ Update

***FROM JUNE 20*** 5. VIX Buy Indicator. We’ve discussed this one multiple times. When the RSI on the VIX (general market volatility indicator) get up to the red horizontal line, it has historically acted as a very accurate “buy” indicator. It signals that the volatility and fear is reaching a peak, and that the market is likely to turn soon.

VIX

6. NYMO Extreme Low. When the NYMO hits the very overextended -80 level, we consider the “buy” signal to be met. With the continuation of the sell-off late this morning, we have no doubt that the already oversold NYMO is continuing lower (chart below from yesterday’s close). This is another important and accurate market “tell” that we watch on a weekly basis.

NYMO2

***SEPTEMBER 24 UPDATE*** As we had expected, since the NYMO has been such a reliable indicator, the broader market saw a strong rally after the oversold NYMO indicator.

NYMO


Apple: Is This Capitulation?

June 20, 2013 (1:15 pm)

Heading into its WWDC, we laid out three charts with explanations as to why we believed shares of Apple would rise during and after the conference. The rising MACD and bounce off the 50DMA: wrong. The potential inverse head and shoulders: wrong. A bullish triangle on the weekly chart: wrong. Clearly, we were wrong on all fronts here, as the shares continued lower and reached as low as $408 this morning.

We believe the tide is turning, however. We’ll lay out a series of charts and historical comparisons as to why we remain bullish on the shares. Three28Capital does not recommend very near-term options plays – it’s simply gambling. But for those with an intermediate- to longer-term timeframe, we believe it’s a great opportunity to pick up shares or options in Apple at these levels. Here’s why:

1. Daily Chart: Bollinger Bands and RSI. The chart below is, in our opinion, the most powerful and meaningful of the charts we’ll explore. First, the daily RSI support (horizontal blue line) has been an extremely accurate indicator. The RSI is now sitting firmly at that support. Second, a meaningful drop (not just a few cents, but multiple dollars) below the lower Bollinger Band has proven to be a very useful data point. Shares of Apple have traded well below the lower Bollinger Band for the past three days. You can see the reaction to either of these “buy” indicators on the chart below. Notice that when both indicators flash “buy” at the same time (which is the case today), we’ve seen the following rallies:

  • Jun 2011: $90 (one month)
  • May 2012: $55 (two weeks)
  • Jan 2013: $50 (two weeks)
  • Mar 2013: $50 (three weeks)
  • Apr 2013: $90 (three weeks)

AAPL BBands RSI

2. Hourly Chart: RSI. Since the September top in shares of Apple, the green and red horizontal RSI lines below have acted as very accurate buy and sell indicators. Shares are now trading below that important 20 RSI level. We expect a retracement of this pull-back over the coming days and weeks.

AAPL Hourly

3. Bollinger Band Compression: A Historical Comparison. We’d classify this one under the “interesting” category (and not necessarily, but potentially, meaningful). The last time the Bollinger Bands were as compressed as they got in early June (which was a width of $22.50) was – coincidentally – in early June 2011… just two days apart between the years. What’s interesting is to compare the subsequent price action. In June 2011, with the BBand width at just $21, the shares dropped nearly 6% over the coming 7 trading days, with capitulation selling to a level well below the lower BBand.

Contrast that action to today (note that the chart below was as of yesterday’s close). With the shares trading as low as $408 today, that denotes a 6% drop over the past 7 trading days. And don’t forget the capitulation selling we’ve seen today to a level well below the lower BBand. After that capitulation in June 2011, there was a dramatic rally of 30% over the following four weeks.

BB Comparison

4. QQQ (NASDAQ) Long-Term Support. Another important data point when analyzing Apple is to consider the NASDAQ index (QQQ). The chart below is extremely important. With this (what feels like) capitulatory selling, the QQQ saw quick and intense selling almost in a vertical decline. It stopped right at the long-term support level that had marked two previous (and important) peaks over the past year. That support firmly held, and the QQQ’s have since held above that support. This is meaningful price action, and we expect a retracement of the pull-back to begin shortly.

QQQ

5. VIX Buy Indicator. We’ve discussed this one multiple times. When the RSI on the VIX (general market volatility indicator) get up to the red horizontal line, it has historically acted as a very accurate “buy” indicator. It signals that the volatility and fear is reaching a peak, and that the market is likely to turn soon.

VIX

6. NYMO Extreme Low. When the NYMO hits the very overextended -80 level, we consider the “buy” signal to be met. With the continuation of the sell-off late this morning, we have no doubt that the already oversold NYMO is continuing lower (chart below from yesterday’s close). This is another important and accurate market “tell” that we watch on a weekly basis.

NYMO2