AAPL's Peculiar Candlestick Pattern

(UPDATE 7/27/10) So it has popped, for now. Still over 1 hour left in trading. It is yet to take out the Wednesday high of $265.15 to be a textbook "Rising Three Method". The market is iffy, almost scared, after bad news on consumer confidence. Maybe I'll book my gain on August $280 calls...

----------------------------------------

Apple (AAPL) is forming an interesting candlestick pattern. I think it is either "Falling Three Method" or "Rising Three Method". I know I know they are total opposite, but I can't decide. So I let you see the chart.

Here's AAPL's 5-month daily chart. Since late April, the stock hasn't gone anywhere. Except for the flash crash on May 6, it has been range-bound. That itself is interesting, as this is one of the most favorite stocks of algo bots - big cap, high volume, high beta.

Here's the explanation of "Falling Three Method" from Stockcharts.com's Chart School Candlestick Pattern Dictionary:

A bearish continuation pattern. A long black body is followed by three small body days, each fully contained within the range of the high and low of the first day. The fifth day closes at a new low.

And "Rising Three Method":

A bullish continuation pattern in which a long white body is followed by three small body days, each fully contained within the range of the high and low of the first day. The fifth day closes at a new high.

The problem I have in determining the pattern is that the first day (Wednesday last week) was an up day but it was a gap up and sold off all day with the market. That doesn't feel bullish. But then, either pattern is a continuation pattern, and Tuesday was a huge up day.

So, cautiously, I am inclined to say it may be a "Rising Three Method" pattern, which means AAPL will go up tomorrow.

The stock futures are currently down. TA people are calling for a "consolidation" after three consecutive up days.

Well, the major indices registered a pattern called "Three White Soldiers", which is a bullish reversal pattern.

There was a sizeable volume (13,494) on AAPL August $280 call option (OE 36,273).

But the algo bots will do whatever they want to do, and the market can melt up or down on a thin summer volume. GLTA.

Large Caps on Turnaround Tuesday Look the Same

I am noticing today that stocks in totally different industries are exhibiting the same pattern on a daily chart. All very bullish candlestick formation (long white candle with hardly any wick), outperforming the general market.

Here are the 6-month daily charts for (from the top):

Las Vegas Sand (LVS)
Nucor (NUE)
Google (GOOG)
Freeport-McMoran (FCX)
J.P.Morgan Chase (JPM)



Don't know what to make of them at this point, other than my guess that algo-bots are simply working the ETFs and index futures so the heavily traded large caps all move the same way regardless of industry or fundamentals.

But even with today's move, these stocks, with the exception of LVS, are either still below 50-DMA or barely touching, or crossing 50-DMA but 200-DMA is still far away. It will take a lot more consolidation to repair the damage.

I personally like LVS (not on the 6-month chart but on the longer charts like 3-year). It was a steal at $1.30 or so in early 2009. It could go up the thin vertical wall that was October 2008 and reach $30. I just don't know when or how. (Casinos in Singapore and Macau, maybe.)

"Turnaround Tuesday" delivered a turnaround. Let's see if they (bots and bots operators) intend to hold it. The Fed chairman Ben S. Bernanke will be testifying in the Congress on Wednesday and Thursday. It could affect the stock market.

Silicon Valley vs the Rest of the US

Or tech vs traditional. Or companies that continue to innovate vs companies that don't. I don't know how exactly to define it, but take a look at the comparison charts below. (They are 5-year charts.)


The first four are the tech companies, three in the Valley, one up in Washington. Netflix (NFLX) broke to all-time high today. Intuitive Surgical (ISRG), Apple (AAPL), and Amazon (AMZN) continue to break out from the high. Their charts say it all: Recession? What recession? Also notice that, except for ISRG, their recent bottom was NOT March 2009. They bottomed sooner than the rest of the market, and off to the races ever since...

Compare them to the rest. First two of "the rest" are tech companies, Google (GOOG) and Microsoft (MSFT). Even though they have recovered from their lows, they don't compare at all with the first four. (That tells me, unfortunately, GOOG has already become MSFT...) Rather, they resemble big, traditional businesses that are listed in New York Stock Exchange, rather than on Nasdaq. Their charts look more like J.P. Morgan Chase (JPM) or Coca Cola (KO). The last one is Freeport McMoran (FCX), a copper and gold company. Although it has recovered a lot, it is still far from recapturing the all-time high.

They (NFLX, ISRG, AAPL, AMZN, etc) are clearly in a bull market, disregarding the rest. In a bull market, you buy a breakout from the high. That's what I learned in the book by William O'Neil (How To Make Money In Stocks: A Winning System in Good Times or Bad, 3rd Edition).

I am not advocating anything, going long or short, here. Do your own DD, but I sure wish I bought every single breakout from the high for these stocks.

Nasdaq Heading Back to Pre-Crash?

I continue to think Dow and S&P are heading to their respective 61.8% Fibonacci retracement area between 2007 October market top and 2009 March market bottom (Dow around 11,260, S&P around 1228) and have been sitting on my long positions.

And guess what. I totally missed the tech rally. I kept thinking, for example, AAPL (Apple Inc.) was a buy when it dropped to $190 in January. $190 was a support for several months. Didn't do anything. I still thought it was a buy at $217 (breakout point), and most recently at $228. I still think it is a buy on a pullback, but haven't done anything about it because I haven't been following Nasdaq as I used to and don't have a good feel for the index.

Nasdaq, after January swoon along with Dow and S&P which many traders and investors took as a sign of imminent severe downturn in the market, recovered and went past 61.8% retracement line around 2250 (that's where the index turned back down in January) and now seems to be on its way to 100% full retracement.



On 10 year chart, Nasdaq seems to be at a "Make or Break" place. The index is currently hitting the upper trendline from 2000 high. It is at a logical place to turn back down again. An ultra-slow slow stochastics (133) shows Nasdaq as an index has been a dead money for the past 10 years. Even now, it has barely emerged from oversold condition, with MACD finally coming back to zero.

We shall see. I think I will start watching Naz again and see how it behaves from here. And I'm hoping AAPL will pull back after iPad launch...

What's With AAPL?

Apple (AAPL)'s relentless march upward since March this year seems to have stalled for several weeks. 7 weeks, to be exact. After the stock jumped on the earnings report, it has stayed in a narrow range for the next 6 weeks while other Nasdaq beta stocks like GOOG, AMZN, PCLN just keep going up.

AAPL may be forming a flat base. Just maybe. The volume in the past 7 weeks is low, with one distribution week. A flat base, if I remember O'Neil's book (How To Make Money In Stocks: A Winning System in Good Times or Bad, 3rd Edition), is one of the most potentially powerful base from which a stock could explode upward. If that's the case, the breakout point is $208.81, 10 cents above the base high.

Here's a 2-year weekly chart of AAPL. AROON (a lagging indicator) green line is drooping down to 70, entering a danger zone of potential sell-off. MACD and slow stochastics still look good enough, with no diversion. The candlesticks on the chart for the past seven weeks are getting tighter, after initial swing up and down.


Chicken Little in me says "It's going to break down big (and take the market with it!)!!" But if this is a flat base, or if this is a super-deep cup (that was formed over 18 months) and high handle, the target price is somewhere above $300 (depth of the cup added to the handle break). ($300?? Yeah right... right?)

I frankly don't know what to think. The last time AAPL stayed at the same place was back in June this year. It was floating around $140 for 6 weeks, and on the seventh week it burst upward. I caught that ride up. Could that happen again? We will find out soon enough, I hope.

Nasdaq Betas That Don't Come Back Down

With just about every analysts eager to call the top, the market marches on, bid or no bid. My portfolio has been rather stagnant for 2 months, with gains in precious metal stocks offsetting the weakness in financials. Probably a top is near, therefore, but I don't think the market will crash back to, say Dow 6,000, right away as some of them proclaim.

Why? Nasdaq "beta" stocks: AAPL, AMZN, GOOG, ISRG, PCLN.

They refuse so far to correct much. AAPL corrected the most after earning and filled the gap. But others, particularly AMZN and ISRG, hardly looked back, and has since resumed the upward march.


How much upside could there be for the major indices? Another 10%? 5%? I am debating whether it is worth to stay in the market, but when I look at these Nasdaq tech stocks it is tempting to believe this is a new bull market, in which you would buy stocks on the breakout from the high.

Nasdaq (and Dow and S&P) at 2009 High

To the chagrin and frustration for the bears, the stock market keeps going up. Today, all three major indices marked the 2009 high with healthy gains but subdued volume (Op-Ex fatigue, maybe).

Barring disaster overnight (and premarket tomorrow), tomorrow's market looks brighter as Apple (AAPL) announced a blow-out earning after hours (the company sold more Macs and iPhones in any quarter in company's history), and the stock is currently trading over $200.

I haven't looked at Nasdaq chart since June (as I don't have tech stocks like I used to), so maybe this is a good time to do that to figure out whether every bear is saying is true ("the market is topping").

The first thing I notice about Nasdaq is the volume. Unlike other two indices (Dow and S&P500), Nasdaq's volume has remained robust. So far, I don't see negative divergence between RSI, price action, volume, CCI, slow stochastics. This is a very strong chart. About the only thing that makes me nervous is the extremely steep ascent from March low (steepest of the three major indices).

Around March 09 bottom, that was clearly a double bottom formation with handle, and the handle break in late May held. I should have paid more attention to Nasdaq around that time, for obviously easier money was in Nasdaq.

The index is right now between 50% and 61.8% Fib retracements, and 61.8% retracement is a logical target (2251). If 61.8% retracement is taken out (75 points away), it could go back up to 2007 high, I suppose. Some of the index components are already in that territory, about to take out all-time high (AAPL, BIDU, AMZN). Semiconductor sector is not acting well, despite the steller result from Intel (INTC). We'll see.

I don't quite see the topping formation on Nasdaq. The ascent has been steep, yes, but so far none of the indicators show overbought condition or trendline break. I personally prefer it would go sideways for a while, but what I think counts nothing toward making the market.

It's been a scary ride holding long positions (some positions as early as March) but I'm still holding most of them. Scary but lucky ride so far.

Three Cheers (Pennants) for AAPL

I've been in Apple (AAPL) since the stock was $144. I don't use any of AAPL's products, can't afford Mac. I don't particularly adore Steve Jobs, although he has my sympathy for his illness. I'm not a fan of Apple, but I do like what AAPL has been doing in the stock market.

Here's a daily point and figure chart of AAPL. Notice the triangle pennant No.1 on a high pole. I commented in my posts back in May and June, but as usual I didn't act on it (it was right after the violent upswing of the market since March bottom). Then the stock made another pole and pennant (No.2). I bought AAPL during this second formation. (Timing was lousy, as I didn't follow my own advice of buying the pennant break. I bought before the pennant was formed, and which happened to be the same price as the pennant break. Oh well.)

Then, it formed another (irregular) pennant (No.3) and bolted up again. Translated into a regular candlestick chart, it would mean a strong upward movement followed by a brief quiet (low vol) period of consolidation, and then another strong upward movement followed by another period of consolidation.

It has done this burst/rest (or pole/pennant) pattern 3 times since the stock market March low (AAPL's low was in January, by the way). Currently it may be still doing the "pole" part of the 4th pattern. If you count each occasion as one base, it may still have one or two bases upward before it corrects again.


AAPL's 2008 high was $192.24 in May, and its all-time high of $202.96 was back in December 2007, right before the current market correction started. Remember January 2008, when the indices went down every single day for 3 weeks, paused, then continued going down in February? When all was done, AAPL's share price was almost cut in half. In the correction that started in May 2008 and ended for AAPL in January 2009, AAPL lost nearly 60%. Since then it has gained 137%. It's a wild chart if you look at it in a candlestick chart, looking too scary to touch it anywhere.

Looking for "Exception": AAPL, GOOG

I try to look for "exceptions"- stock, sector, index that doesn't move with the flow (whether it's down or up), because I've noticed that those often gives clues to easy trades that may come soon.

I wrote about how I missed GOOG entry and exit several posts ago. I also wrote about the possible AAPL entry 2 weeks ago. (I wish I followed my own advice.) Despite the misses, I've kept watching these two, (former) Nasdaq beta stocks. I say "former", because they don't seem to behave like one any more.

As I said in both posts, I didn't like them because of low volume. Then I started to notice something peculiar in the past 2 weeks. The market goes down, these two stocks remain green. The market goes up, these two stocks go up, but not by much. I mostly watch them on my main stock screen panel, and every trading day regardless of the market direction, these two stocks remained positive. In the past 10 days, Nasdaq went down on 4 days, and up 6 days.

So I called up the charts for both of them after Friday's close. They are 7-month daily charts. Well, well. There is some singular activity going on. First, they almost look identical. Second, both AAPL and GOOG finished 9 consecutive trading days of going up. The amount of increase each day was not very significant for these stocks. It is as if the buyers didn't want to alert the trading public by moving the stocks too much too fast. Although the volume for both stocks is lower than what was once a norm, it has decidedly picked up. Quiet accumulation..?

For AAPL, the last time the stock went up for 9 consecutive days was early May 2007, the beginning of the stock's huge run from $100 to $200 in 7 months. For GOOG, I couldn't find any other instance, except September 2007 when the stock went up 4 consecutive days, paused one day, and then continued to go up for another 6 days. Again, that was the beginning of the stock's climax top. GOOG went from $520 to $740 in two months.

Both stocks are now pushing the upper bollinger band and look stretched and due for correction. If my reading is right (chance may be miniscule, but not zero), however, these stocks are set to go even higher. Significantly higher, as their weekly chart formation (cup and handle) tends to yield gains equal to the depth of the cup. That would bring GOOG to $540, AAPL to $250, PROVIDED THE GENERAL MARKET REMAINS BULLISH.

I decided to take a chance on AAPL via a tiny position in AAPL October call options. If I'm wrong, all I lose is the money I put down to buy the options. The only reason I picked up AAPL over GOOG is that I liked the AAPL's P&F chart: the triangular pennant strongly broken out to the upside. But again, it all depends on how the general market behaves. After all, they are beta stocks which will move with the market in an exaggerated manner.

AAPL's Second Deep Cup and Handle

That's what I'm seeing. This morning's headfake (dipping down briefly to fool bears) didn't fake Apple (AAPL). It is currently up $6 (5%) and trading at $129, vastly outperforming Nasdaq. From the looks of it, for the first time in several weeks, the trading volume seems set to increase.

The last time I traded AAPL long was exactly one year ago, when just about everyone was excited with the prospect of a massive "cup and handle" formation on Nasdaq index, and many of its components, particularly AAPL. Then the handle started to get longer and droopier, and the rest is sad history. (The market decline, in my opinion, started in early June last year, not October.)

Let's take a look at AAPL's 2 year weekly chart. The first cup and handle that people were so excited about last year now looks more like a V. The second cup and handle, the one I'm seeing now, is slightly better shaped (just because it took longer to form). Since the current low undercut the previous low, (if I remember what I read...) this would be considered the first base. The handle high is $133.50, only slightly above 50% retracement from the low to the beginning of the cup (August 08). That is a bit low for my liking but not too bad either considering how the general market had crashed.

If the handle break occurs, it could go on to fill the gap from September 08 (September?? Oooh I just noticed that AAPL crashed in September 08, not October when the general market crashed). My target would be about $160, if that's the case.

AAPL's Point and Figure chart has a dreamy, almost hallucinatory target of $231, by the way. It has a very peculiar formation, like a flag pole and a tiny pennant flying.

What I didn't like and still don't like about lots of big-cap Nasdaq stocks is that their volume on the way up since March 6 low is very subdued. I've heard arguments that since the stronger hands are buying these stocks, you don't need volume. Maybe, up till now. In order to break out of the seemingly constructive formation (cup and handle), the stock needs more volume. The proverbial "money on the sideline" has to come in.