It's a Bad Time to Short Apple

A friend of mine heard about it all day: Apple (AAPL) was trading above $500 for the first time. He also knew the S&P 500 was back at its 1350 resistance level. He put two and two together and wondered if the time had come. Apple has gone parabolic, he told me. The stock is way overextended and overbought. The market is at resistance. Is it time to short Apple? Looking at the chart, I could see his point. Apple's relative strength index had climbed above 86 -- and any reading above 70 is considered an overbought signal. RSI also indicated that Apple had been overbought every day since Jan. 26 (shaded yellow). The stock, which tested its 200-day moving average less than three months ago, had gained $140 per share since Nov. 25 (indicated by the arrow). Apple (AAPL) -- Daily Source: TradeStation View Chart » View in New Window » The chart certainly laid out an interesting case, but I told my friend it probably wasn't a good idea to short Apple. Pressed for time, I couldn't elaborate -- but if I'd had more time to organize my thoughts and explain my trading philosophy, this is what I would have told him: 1. Don't short a strong stock in a strong market. If you really believe the market is going to pull back, short the market via an index or ETF. Better still, short a weakling. Amazon (AMZN) is a perfect example of a stock that has failed to rally with the market, Monday's strength notwithstanding. If the markets do reverse, it's the weak ones -- the stocks that nobody wanted on the way up -- that tend to get hit the worst, provided that the stock in question hasn't already completely cratered (see Research In Motion (RIMM)). Since the beginning of October, the SPDR S&P 500 (SPY) has risen 23.13%, while Amazon has lost 9.62%. AMZN vs. SPY -- Daily Source: TradeStation View Chart » View in New Window » 2. An overbought stock can always become more overbought. During the great bull market of the late 1990s, it seemed as if stocks were reachng new heights every day. Still, there were traders who missed out on what some would describe as the easiest trading environment ever because they simply refused to go long any stock that was overbought. Imagine how they felt when markets became more and more overbought every day. 3. What goes up doesn't necessarily have to come down. Worse still, some of these same traders would short the bull market in the belief that what goes up must come down. That may be true when it comes to gravity, but Sir Isaac Newton wasn't a trader. In the world of trading, what goes up doesn't ever have to come down, and what goes down certainly never has to go back up. You don't want to be caught net short in a bull market. Instead, rotate between net long and neutral. 4. Price is the ultimate indicator. Some folks believe that if an indicator gives a sell signal, the stock must obey, but that's simply not true. Sell signals are much more effective in bear markets, and buy signals are more effective in bull markets. If you shorted a stock every time it became overbought during a bull market, you'd be constantly fighting the trend. The price doesn't have to obey the indicator. In fact, you could say that the price itself is the ultimate indicator, as nearly every popular technical indicator is a derivative of price. For example, a moving average is an average of prices, and an oscillator like RSI measures the current price vs. recent prices. As for my friend, I certainly hope he didn't short Apple. If he did, he may ultimately make money -- you never know. But, if I may offer one more piece of advice pertaining to Apple, it is this: Never stand in front of a freight train. _______ Editor's Links More on Apple: Apple's Earnings Do the Talking 5 Stocks to Buy on a Pullback AAPL: Shattering Records (Options Profits)

It's a Bad Time to Short Apple

Here are several reasons why.

Columnist Conversation

8 Trading Rules from T. T. Hoyne

This Weekend on Real Money

Classic Trading Rules From Bernard Baruch

COLUMNIST TWEETS

Please Join or Log In to manage and receive alerts.