Rotten Apple
Oversold? Did I hear someone say Apple
Computer was oversold? Bargain-priced P/E ratio? Oversold RSI reading? Don’t bet
on it.Â
After a stock craters like Apple
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did Friday, the remaining shareholders are in a state of abject misery. If the
stock falls again, the odds are that many of these weak holders will crack and sell.
If the stock bounces, the odds are that many of these weak holders will run and sell.
After Thursday’s close, the computer
maker warned of a fourth-quarter profit decline due to a sales slowdown
affecting its new Power Mac G4 Cube. The Cupertino, Calif.-based company said it
expected to report Q4 earnings, excluding investment gains, of 30 to 33 cents a
diluted share, far short of First Call/Thomson Financial’s consensus estimate of
45 cents.
On Friday, Apple
shares gapped down and plunged 27 3/4 to 24 3/4 on volume of 132.4 million
shares. That’s more than 17 times the stock’s daily trade averaged over the past
50 sessions, a massive desertion by institutional money. And the stock closed
near the bottom of the day’s trading range.
You’ll notice that the stock’s
Relative Strength Index now reads 24, well below the 30 level marking the
beginning of oversold territory. RSI can provide a useful gauge for contrarian
plays, but I’d never rely on it exclusively. By definition, bear markets — be
they in individual stocks or in groups of stocks — are markets that cannot find
a bottom. They flash oversold readings on conventional indicators all the way
down.
Earlier this week I pointed out lesser,
but still impressive, gap-down price moves in Intel
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PowerRating) and Eastman
Kodak
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PowerRating) as possible shorting opportunities. The key is to look for the
pullback or bounce, perhaps even a short-covering rally. The time to short is
when the bounce stalls, and the stock resumes its downward price move.
Look at how those stocks behaved after
their gap-down moves earlier this week. Note the extended oversold RSI readings
in both cases. Also, noticed how Intel and Eastman Kodak each bounced the
session following the gap, only to roll over.
For an introduction to short-selling
patterns, see my lesson, Sell
‘Em Short: rading The News. Also check out my lesson ETF
Trading Tactics, Part 3: How To Short ETF Breakout Failures. The
base-failure pattern described in that lesson works for stocks as well as
exchange-traded funds.
All stocks, of course, are risky. In
any new trade, reduce your risk by limiting your position size and by setting a
protective price stop where you will sell your new buy or cover your short in
case the market turns against you. For an introduction to combining price stops
with position sizing, see my lesson,
Risky Business. For further treatment of these and related topics,
you’ll extensive lessons in the Money
Management area of TradingMarkets’ Stocks Education section.