In the May 28th newsletter, I speculated that Apple (AAPL) may be forming an Inverted Head and Shoulders bottom. APPL did not follow through on the upside. If a breakout above the base had occurred, buying the stock or implementing an appropriate option strategy would not only have made sense, but a good Reward-to-Risk trade.
Instead, AAPL went on to produce what now appears as a well-defined trading range.
AAPL has moved almost straight up, gaining 16.6%, since June 28th when it came off the lower support level. Could this be the start of AAPL's rebound, or will AAPL stay within the consolidation range for a while more?
For a clue, we can look at the recent volume pattern. As AAPL approached the upper part of the trading range, volume fell off.
With every trade you consider, you should ask yourself “how do I increase the probabilities of this trade?” If you can't, the best trade may be ‘no trade'.
With any stock that has formed a well-defined trading range, you should watch how the stock approaches each end of the range. If volume falls off then the stock is not likely to power-through the support or resistance line, at least not yet.
If the stock heads off in the opposite direction, back into the trading range, and especially if volume increases, then it is likely you can find a good Reward-to-Risk trade to play the move to the opposite side of the range.
But if, upon approaching the edge, volume falls off, but the stock does not strongly reverse, it may be setting up to finally break out of the range. The high probability trade then is to exit any bullish positions, such as long stock or bull call spreads, as the stock gets into the upper 10% to 20% of the trading range, and if the stock closes solidly above the range, on increased volume, either re-entering the stock or entering a new bull call spread, with appropriate stop-loss points on the trade, significantly increases the chances of a successful, profitable trade.
Entering a new bullish trade, or holding on to an existing one as the stock nears the top of the trading range, has much less chance of working out. The chance for the stock to rebound downwards is high, until the stock proves itself. Always make the stock prove its strength before committing funds to a position.
We can think about the possibilities and keep our eye on the stock.
AAPL's weekly chart makes the trading range appear as a tight consolidation, from which AAPL should rebound upwards. The weekly Stochastics have already produced a ‘buy signal' from moving up through the 20 level. The two lows while in the trading range form what we may look back on as a ‘W' bottom.
There is a reason why we should watch AAPL closely right now. Apple has a track record of releasing new iPhone models this time of year. The previous releases of iPhone models were all made around the late-June through mid-October timeframes. There have been reports of a new iPhone coming out, and even of ongoing production at Apple-contracted plants in China.
It is estimated that Apple makes $442 profit per iPhone, before corporate expenses (advertising, employees, etc). Apple sells about 25 million iPhones per quarter. If the next version of the iPhone comes out soon, it should affect Apple's Q3 earnings, due to be announced on October 22nd, and the stock may have a good run-up before that in typical anticipation of positive results.
In Seasonal Forecaster newsletters this week I will cover at least 2 option trade strategies to play what should be an extended up-move in the stock, if AAPL closes above the upper resistance level.
Of course, there's much more you need to know and many more stocks you can capitalize upon each and every day. To find out more, type in www.markettamer.com/seasonal-forecaster
Copyright (C) 2013 Stock & Options Training LLC
Unless indicated otherwise, at the time of this writing, the author has no positions in any of the above-mentioned securities.
Gregg Harris is the Chief Technical Strategist at MarketTamer.com with extensive experience in the financial sector.
Gregg started out as an Engineer and brings a rigorous thinking to his financial research. Gregg's passion for finance resulted in the creation of a real-time quote system and his work has been featured nationally in publications, such as the Investment Guide magazine.
As an avid researcher, Gregg concentrates on leveraging what institutional and big money players are doing to move the market and create seasonal trend patterns. Using custom research tools, Gregg identifies stocks that are optimal for stock and options traders to exploit these trends and find the tailwinds that can propel stocks to levels that are hidden to the average trader.
Also on Market Tamer…
Follow Us on Facebook