When It’s Sunny, Bring A Ski Jacket

A couple years ago, when I took my family to
Colorado,
we visited the Air Force Academy in Colorado Springs. As we walked
from the parking lot to the entrance, I remember that the sun was shining and it
was awfully hot. Then I saw some clouds come quickly over the horizon
and before I knew it, we were in the midst of downpour and the temperature had
probably dropped 20 degrees. This happened within a span of a couple of minutes. We
ran back to our car for our sweaters and jackets.

In Monday’s market, we saw a similar shift in the weather take place. Just
when many analysts were declaring the “summer rally” officially alive
and well last week, the market began to tank. Monday, we saw the follow-through
to the downside.

As traders, we always want to keep our eyes open for the proverbial red flag,
i.e., factors that indicate that the picture isn’t quite as rosy as you thought.
Andy Grove’s philosophy of “only the paranoid survive” is something
you should tape to your refrigerator.

A good chart that illustrates the technical breakdown suffered in stocks like
(
VRTX |
Quote |
Chart |
News |
PowerRating)
,
(
TLGD |
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Chart |
News |
PowerRating)
,
(
TIBX |
Quote |
Chart |
News |
PowerRating)
, and
(
DELL |
Quote |
Chart |
News |
PowerRating)
is the following chart of Apple Computer
(
AAPL |
Quote |
Chart |
News |
PowerRating)
.

What is so instructive about this chart and the chart of the
other stocks I mentioned, is that if you were looking at these charts over the
weekend, you actually might have concluded that the conditions were there for a
strong move higher on Monday. Notice how AAPL was right on trendline support at
Friday’s close.

But in Monday’s action AAPL dropped below that trendline support
and then dropped below the level of its five-week trading range on 200% average
volume. Not a good sign.

More important than the actual drop, however, is what you
learn from it. You need to watch your back and stay open-minded in these
crazy markets of ours, especially when you’re in a position that looks promising
and you’re starting to feel cocky. When it’s sunny, bring a ski jacket.

Until tomorrow,

Eddie