Trader’s Narrative

In poker, you have to know and watch for “tells”. These are habitual behaviours or reflexive actions of opponents. By watching for them you can know whether they are bluffing (or not). The same type of “tells” exist in the stock market.

As can be seen in the relative strength chart (see below) Apple (AAPL) has been one of the strongest stocks throughout this bull market. It shrugged off the March 2007 correction and kept on barrelling ahead. For me, AAPL is a “tell” for the current market.

All the smart and “hot” money has been trading it and riding it higher. And you can bet they will run for the exit at the first sign that the party is over. Which is why I watch Apple so closely. I’m seeing a confluence of things which gives me reason to believe that the ride may be over.

For one, the sentiment picture is just too bright. Take a look at this recent Economist magazine cover page. Although I’d prefer to see such a glowing cover story on a more general magazine like, say, Business Week, it still is a cover page. The last time I pointed out an Economist coverpage was the one they did for Goldman Sachs (GS). That one did a fine job of alerting GS longs to take profits and go home.

The other reason is the upcoming launch of the iPhone. As the old adage goes on Wall Street, Buy the rumour, sell the news. The closer we come to the June 29th launch of the much hyped iPhone, the higher the expectations. And the easier to fall short of them.

Also a bunch of technical indicators are signalling caution. For one, look at the lofty heights that Apple is trading relative to its long term (200 day) moving average. The last time it was at this level was in January 2006. And you know what happened then.

As well, if you draw trendlines on its chart, you’ll notice that for its latest upleg it has basically gone parabolic. Such a steep rise is simply not sustainable for more than a few weeks to a few months maximum.

Now, some may be looking at the relative strength and thinking that you should always buy strength. But its not that easy. It never is. The last time it peaked, relative strength also looked good. But that didn’t last. And if you notice, during that upleg it was also going parabolic.

Finally, today’s action seems ominous. It was a a wide range engulfing candlestick which took price down 3.5%. I had been meaning to write this post during the weekend but forgot. But even if you missed today’s move, there’s ample room to tighten stops on Apple.

I don’t think it is an automatic short here since it could very well go into a protracted range and work out its overbought condition. But if you’re long, I’d be very careful here.