Apple briefly crossed $400 today, before closing back above that key level. Here’s my take.

Discussed in this article: Apple Inc. ( $AAPL )

We’re going to look at Apple ( $AAPL Apple Inc. ) and also Cirrus Logic ( $CRUS Cirrus Logic, Inc. ). Now, turns out, about 100 points ago, I was talking on CNBC about how 500 was a critical level as long as that level held up, and it was all good, but if that level broke down what it was really doing was completing a head and shoulder reversal pattern where this is the left shoulder, and members you know this, this is the head and then the right shoulder was here with the neckline connecting these two lows, took this stock to right around $500.00. So the idea was that if you look at the distance between where the peak was and where that neckline is, that was about 190 points.

A technical analyst will tell you, any technical analyst will tell you, that a head and shoulder reversal pattern, once the neck is broken tends to do the following, come up and test the breakdown, that’s what happened here, and then this stock has continued to fall and then also the minimum move, the minimum price target would be the same distance between the head and neck line, here 190 points, you take that same distance and subtract it from where the stock broke down, from where the neckline broke, which is 500. So you subtract 190 from 500, and what do you get? Well, you get $310.00. I remember explaining this to Carl Quintanilla, we were also talking, I think we were talking Blackberry ( $BBRY Research In Motion Ltd ) at the time, I forget, but I said, “You know, that’s a measured move on Apple ( $AAPL Apple Inc. ), sorry, that’s just the way it is, that’s the technical picture.” But, it’s kind of silly, I think I used the word silly to say that you think Apple’s ( $AAPL Apple Inc. ) going to drop down to $310.00, but the bottom line was, you just got to watch the 500 level.

So it’s fallen 20 percent since then, and I’m not saying that the stock is actually going to go down to $310.00, because that would be predicting and that’s not what I do; I manage risk. I am saying that this trend is pretty stinkin’ nasty, and the stock broke below 500 today, down $2.00 more, so it’s not like there were a bunch of buy orders rushing in to buy Apple ( $AAPL Apple Inc. ), like you know, limit buys. Okay, if Apple ( $AAPL Apple Inc. ) falls to $400.00 then I’m going to go buy this stock. It didn’t do that, the stock just kind of floundered around, but also, and this is important, a fall below 400 didn’t trigger a bunch of sells either, it didn’t trigger a bunch of stops where you bought the stock from higher levels and you’re saying, “Okay, I don’t like this and I’m going to hang on, but if this puppy falls below $400.00 I’m out of here.” We know that it didn’t because if it did Apple ( $AAPL Apple Inc. ) wouldn’t have stopped at 398, it would have had a big plunge.

So what does that tell us? This is really important because of the downtrend. What that tells us is, look I hold some Apple ( $AAPL Apple Inc. ) in my long-term account, and I’m sick over it, but that’s just a methodology of a long-term account, some days chicken, some days feathers. But what you’ve got is, sure, a bunch of nervous longs, but they, you know, bulls, but they haven’t capitulated, they’re not capitulating at $400.00, and why is that? Well, the company’s got a boatload of dollar bills, okay, it’s got a lot of cash, they’ve got great products, just not any new ones, and as the stock falls lower the P/E gets lower, the valuation gets more and more attractive, so it’s at that point where fund managers who own Apple ( $AAPL Apple Inc. ) are not going to jettison this stock at $400.00; they wished they’d jettisoned it at 700, maybe even 600, but as it gets down here the valuation becomes more and more compelling. These guys aren’t that stupid, they’re not just going to ditch the stock.

So, why is this important? It’s important because this downtrend still has legs, okay, we are not at a capitulation, look at the volume here, the volume has not been that heavy. This is what we like to see for a capitulation, this big, massive volume day; fine, that’s what we got; this is a weekly bar chart for two weeks we got a bounce. Yipee, and then we’re down lower again. So volume is actually tapering off, and in my view that’s actually kind of bearish for this stock, because it’s not holding at 400, but it’s not really selling off either, so I think we’re just going to continue to get this drift lower.

Also, earnings are the big catalyst and in my view if earnings stink up the joint or they give poor guidance and the stock gets pummeled, I think that is ultimately going to be your buying opportunity if the stock implodes after earnings because it’s already come down so much that it’s one of these things, you know, you’ve heard the old adage, “Buy the rumor, sell the news,” or as I say, “Buy the anticipation sell the event.” Well here we’ve been getting, sell the anticipation, meaning everybody’s bearish on Apple ( $AAPL Apple Inc. ), so we sell the anticipation and then we buy the event when Apple ( $AAPL Apple Inc. ) does, or if they announce really horrible earnings then the stocks going to fall and finally you get that capitulation, you’re going to get a massive volume spike and that would be the time to consider buying Apple ( $AAPL Apple Inc. ), only to consider buying Apple ( $AAPL Apple Inc. ), and we’ll cover that when they do announce earnings.

What I’m looking at here is Cirrus Logic ( $CRUS Cirrus Logic, Inc. ). These guys supply semiconductor chips to Apple ( $AAPL Apple Inc. ). They reported that they’ve got kind of an inventory glut, okay. Well that’s not good, because that means Apple ( $AAPL Apple Inc. ) is not using the chips that Cirrus Logic ( $CRUS Cirrus Logic, Inc. ) makes. Cirrus Logic ( $CRUS Cirrus Logic, Inc. ) ain’t going to make chips just for the sake of making chips. So it was a surprise to Cirrus Logic ( $CRUS Cirrus Logic, Inc. ) that their chips were not going to be bought. So what does that tell us? It tells us that Cirrus ( $CRUS Cirrus Logic, Inc. ) is kind of scratching its head going like, “What’s up with the sales in the “i” stuff? I’m not getting this.”

So what this really all just boils down to is this, you always want to avoid being really, really bearish at what turns out to be the bottom, just like you want to avoid being really, really bullish at what turns out to be the top. That’s this latter instance as far as what turns out to be the top. That happens so often, it’s probably happened to you, that happened to me once, way back in the day, where the future just looked so bright on some stock that you just got to wear welding goggles in order to see and so you wind up capitulating, you’re on the sidelines, on the sidelines you’re waiting for the buying opportunity, it never comes and finally you can’t take it anymore, you got a bad case of the can’t help it’s, and what do you do? You go ahead and buy some stock, as soon as you buy there’s like a signal that goes out on Wall Street, it’s like a big buzzer, okay Fitzpatrick’s in, everybody sell. It happens, it’s a true phenomenon. Well we can get this on the downside as well, where you’re standing here, or maybe you’re short the stock, or maybe you’re itching to short the stock, you’re just saying, “I should have shorted this stock up here, look at Apple ( $AAPL Apple Inc. ), man, I knew I should have shorted it on that break in the neckline. Okay, well now you know it bounced here, now it’s even at a lower level so maybe I got to short it now.” So you’re sitting there and you’re going to short the stock at what ultimately turns out to be the bottom. You don’t want to do that.

What I’m saying is you want to manage your risk. I wouldn’t be short Apple ( $AAPL Apple Inc. ) right now, but I sure as snot would not want to own it either. Like I said, long-term account, not happy about it, but it’s a long-term account. I’m sure that in a year or two, or three or whatever long-term stands for, I’m going to be fine and this is why; because ultimately Apple ( $AAPL Apple Inc. ) will bottom, it will hit a low. When it does, when you think it does, look at Cirrus Logic ( $CRUS Cirrus Logic, Inc. ), these two are basically trading in sync. Doubt me? Let’s compare the two. Black line Apple ( $AAPL Apple Inc. ), whatever color that is, Cirrus Logic ( $CRUS Cirrus Logic, Inc. ). Look how they’re trading in sync, so you want to stay away from Apple ( $AAPL Apple Inc. ) or Cirrus Logic ( $CRUS Cirrus Logic, Inc. ) until the other one goes up, until that time, when they’re both moving in sync, you don’t want a piece of this action. Now after earnings, if the company announces good earnings and the stock pops, that could wind up being a 59-minute trade, that’s just my little thing for day trading on the first hour of the open. Why? Because right now everybody that bought in this box is losing money and they are not happy about it. Apple ( $AAPL Apple Inc. ) is a very over owned stock; still the largest holding in many, many, many funds.

The point is, if Apple ( $AAPL Apple Inc. ), instead of falling, like really gapping down and giving you a buying opportunity on the capitulation, if instead it pops higher, gaps up in the morning, and then does not continue, and I kind of doubt that it would, that’s when you short this puppy. Then what do you do? You wait for this stock, and members you’ve heard me talking about this, you wait for this stock to drift down and form a higher low, create a higher low relative to this one. So okay, it’s had a higher high, relative to this one, now it’s not a higher low; now we can buy it. That’s how I suggest trading Apple ( $AAPL Apple Inc. ).

Now I know this has been a lot longer than usual, but you know what? I don’t care if you’re a member, it’s really important that you know this stuff, because I don’t want you losing your dough. But you can do this stuff, I’ll tell you, you can do it, it just takes a lot of hard work. As I was getting ready to do this I heard the guys on “Fast Money,” and forget who it was saying, “This is like a once-in-a-lifetime buying opportunity to buy Apple ( $AAPL Apple Inc. ) at $400.00,” whatever. By the way, he could be right, I could be wrong, but I already told you how I would want to trade Apple ( $AAPL Apple Inc. ) on the upside; by the way I’ve described this, I embraced the fact that I will not be catching the bottom here, there will be people that buy it at lower levels than I do. However, I will be comfortable with mine because I’ve got risk on my side. Up, down to a higher low, then a bounce, buy the stock, put the stop there, end of story so we’ll see.

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