Catch a Falling Apple

 | Dec 06, 2012 | 5:06 PM EST
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In a bit of a departure from the usual routine, today I am going to talk about everyone's favorite stock, that market darling, recently fallen from grace. Apple (AAPL) and its related index, the Nasdaq-100, have taken a pretty serious hit over recent sessions, after scoring multi-year highs just a few weeks ago.

Of course, the Nasdaq-100 was trading much higher, near 4800, at the top of the dot-com bubble in early 2000. But even at current levels below 2700, it has been among the strongest of indices. On Sept. 21, it scored an 11-year high at 2878. From there it has taken quite a spill, bottoming last month (Nov. 16) at 2494. That's a drop of 13.3% from the highs. Of course, you don't have to look much further than Apple to see the reason for the sharp selloff. So let's start there, with Apple, which accounts for about 20% of the value of the index.

As you know, Apple is under pressure for a bunch of fundamental reasons that you've no doubt heard about, so I won't go into them here. What I will note is that the stock is also getting lots of negative press for some technical reasons, none of which really sound too serious to me.

First, there is the dreaded "death cross," which appears to be pretty much a foregone conclusion. This, of course, occurs when the downtrending 50-day moving average crosses through the uptrending 200-day moving average. That's apparently going to happen tomorrow or the next day at the $601 level, and it really doesn't matter much what the stock does -- I mean, unless it jumps up about 100 points in the next couple of days.

But my point is, so what? How many times have we seen death crosses amount to nothing in the S&P 500 or Dow? About as often as they amount to something. So who cares? I don't. In fact, because the stock has been so strong over recent years, there aren't many instances of death crosses occurring in Apple. But apparently the one that occurred in 2006 marked a great buying opportunity for the rally into the 2008 top. Then there was a death cross in 2008 that did amount to something. But so what? Everything dropped from the late 2007 early 2008 highs. OK, so there's that -- the dreaded death cross. It probably marks a buying opportunity, since everyone is fretting about it.

Then there is the developing head-and-shoulders topping pattern. Ooh! Now, granted, this one could amount to something nasty on the downside, but if the recent lows hold at $506, it probably won't.

AAPL Head and Shoulders

More important, from my perspective, is what happened today, at least as of 3 p.m. Eastern as I am writing this column. The stock sold off to the $518.63 level this morning, and that was enough of a drop to fill the big Nov. 19 gap at the 527.68 level, but, at the same time, the stock held above the Nov. 16 lows. From the morning lows, the stock has now rebounded 35 points back up above $553. So does that mean that we're out of the woods? Not really, but it suggests that there are still trading opportunities in both directions, and for now, though I am well hedged, I am willing to write the distant February puts into weakness.

A similar pattern is seen in the Nasdaq-100, which I highlighted on Tuesday as signaling a near-term top in the market. Bigger picture, there is also this developing head-and-shoulders pattern which could point lower, but it's still too soon to tell. Here, what is noteworthy is how much this looks like Apple. And why not, since it's 20% Apple?

Nasdaq-100 Head and Shoulders

But in the short term here as well, I like what I am seeing. Granted, I would have preferred a pullback to the Nov. 23 gap at 2600 as the spot to buy, but in fact, I bought back my positions yesterday morning at the 2629 level after selling them last Thursday when the Nasdaq-100 filled its Nov. 7 gap at 2681. So I won't complain. If the Nasdaq-100 fills that gap at 2600, I will add to my mutual fund positions and probably write some more of the PowerShares QQQ (QQQ) puts.


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