Monday, July 30, 2007
by David Yu
If you believed in technical analysis, you'd believe Professor Eugene Fama's EMH (Efficient Market Hypothesis). Simply put, this means financial asset's current price level reflects everything known to the market from the past, present, and the future. And, I emphasize the word believe because we're not endowed with the ability to see the future. We don't know what's going to happen in fact. We can only try to understand the probability of what's going to happen.
Assuming everything there is to know about AAPL has been factored into its current price level, which includes the iPhone and the recent earning report, AAPL's inability to sustain above the $142.50 - $143 range speaks volume of the probability of where its price's headed.
This 30-min intraday chart (Chart 1) covers the period from 6/29/2007 to today, 7/30/2007. AAPL price moved up substantially after the release of iPhone. The "iPhone Movement" eventually ended with the highlight of an Island Top that pushed the price down to ~$138, the same price level as the intraday high prior to the formation of the Island Top.
Then came the "surprised" earning report that caused the price to gap up from around $142.50 all the way to almost $149. But it had since retreated back to under $142.50 and stay pretty much below this price for most of the day today. I'd assume this had now become the short-term price ceiling, or the resistance. This then created a "Gray Area" between $138 and $142.50. This means that the market was unsure of the pricing of this stock at this point. The earning seemed great, but there's something in there that didn't sit quite well with investors. What is it? And, should the price be above $142.50 or below $138?
The next move in either direction would tell us where the market thinks AAPL's reasonable price should be. And so, we'll examine the probability of where that next move is going to be.
Chart 1
The price and the breadth action of AAPL over the past 30 days seem to indicate a much higher probability of going down rather than going up.
Chart 2 below shows that during the period of the iPhone and the earning report's feeding frenzy, the breadth had actually deteriorated. And, yes, amidst every analyst's cheerleading as well, and I mean EVERYONE. The positive volume (the black bars) in the lower pane of the chart had been decreasing along with the RSI in the upper pane (see red arrows). And, today's closing price of $141.43 also fell below the 13-period (one day) and the 26-period (2 days) moving averages.
Chart 2
It would appear to be a great opportunity to go on the short side. In respect to this profit probability I bought some August $110 put option contracts (.QAATB) at the bargain basement price of $0.15 (see ledger below). If AAPL failed to stay above $138, I would not be surprised to see the price fall below $135 or even $130.
Good hunting!
David Yu