Thursday, April 06, 2006

Short Apple

I believe it's time to short Apple Computer (symbol AAPL). Close out any position if the price crosses above $73.

Below is a chart of Apple's entire trading history since their 1981 IPO (adjusted for splits, of course). I have highlighted in green five discrete "hyperbolic rallies", the most recent of which is the most dramatic and peaked last January 12th.


I'm not an Apple-basher, by the way. I bought my first Macintosh early in 1984, shortly after it was introduced. I worked at Apple for nearly three years in the late 1980s. And Steve Jobs has been my personal hero since I was a kid. So Apple is a great company with wonderful and well-polished products.

But their stock is atmospheric at this point. I would characterize the five tinted "hyper-rallies" as follows:


  • 1982-1983 - General high-tech rally; anticipation of Lisa & Macintosh

  • 1986-1987 - Post-Jobs ouster recovery and popularity of Mac as desktop publishing tool

  • 1990-1991 - Post-Kuwait tech rally and popularity of faster Macs, such as the IIfx (Multimedia)

  • 1998-1999 - Jobs influence on product line improves earnings and reputation

  • 2004-2005 - iPod rally, earnings momentum

You can clearly see what happened after each of these five hyper-rallies. The stock fell, and it fell hard and fast. The stock already started doing this over the past 10 weeks, although the past couple of days have pushed the stock up to a much safer level for bears. Here's the entire "iPod rally", where the stock went up more than ten-fold.


Taking a closer look at recent history, you can see the Fibonacci retracement closely aligns to the price behavior. Indeed, today the 50% retracement was nailed to the penny. I'd say this is a relatively safe high reward/low risk trade.

8 comments:

bsi87 said...

Looks early to me. I'd like to see an intraday reversal at least. It's got 27 pts between the top and the latest low so you have the potential for fib retracement of 68.1 up to about 76 or so. JMO.

John Wheatcroft said...

I'm in agreement with the last commenter. My mill says that the stock just rolled over going up. I see as much as 78-83. Not that it couldn't do a short term pull back based on the last couple of days (Windows exuberance). But I believe you are correct - it is getting close to an overbought condition.

Kapil Khanna said...

Tim,
Entering a trade on Fibonnaci against the primary trend, has generally performed poorly. In this case, Fibonnaci is great for exiting, if one was long in AAPL on they way up from $58 - like me.
This one is showing great strength and is attempting to rally past its previous high. Depending on tomorrows action, we may end up with a very strong 3 white soldiers pattern. Also buddy, where is your stop loss if one shorts this at $73?

PB said...

On P&F charts, the trendline from the high (at $86 and change) will only be broken if AAPL crosses into $75, until then the picture is bearish

Tim Knight said...

Well, it's down 3% already early in the trading day, and it's been down all day, even when the NASDAQ was hitting a new high. So far, so good.......

costas1966 said...

TIM THE BEARS WANT YOU BACK!!! I CAN HEAR THEM WAKING UP FROM THEIR HIBERNATION!!! TIME TO JUMP BACK TO THE RIGHT SIDE!!!

Kapil Khanna said...

Tim,
Whats down 3% must be put in perspective. Its been up 20%, so a 3% drop is a pullback. Its giving everyone another chance to join before its next journey north.
Once again, why wont you go long if it crosses $73?

rob t said...

Just when you thought it was safe to go back into the water.