David's Trade Journal

[david_3011]

Trade Journal: Apple Computer (AAPL) w/Full Tech Note

I don’t want to get into the full debate about Apple and Microsoft PC. I’m merely offering a little fundamental understanding as I did with most of my trades.

According to WSJ online survey chart below, majority (46%) of voters thought the reason Apple has had a small share of the PC market was due to buyer’s reluctance to change system. This isn’t anything new. It’s the same reason since the 80’s, and, unless something drastically changed, it’s going to be the same reason going forward.



Steve Jobs didn’t believe market shares matter at all. Last year and the year before, Apple computer accounted for just about 2% of the global PC sales. It’s not the computer sales that led Apple’s financial comeback, it’s the iPod. iPod now brings in 1/3 of Apple’s revenue. So, the question is whether the market is in favor of this business model moving forward.

From this chart below, market didn’t seem optimistic about Apple’s outlook. There’s the usual on this chart. The ADX (thick black line) was trending down while the –D (red) had just crossed above both the +D (green) and the ADX. MACD had also just turned negative with the histogram in the negative (below 0) territory.

And, it’s never a good sign that while MACD starts to trend down, PVO (Percentage Volume Oscillator) begins to pick up. PVO, while still under 0, just broke above the recent downtrend last week (red trendline).

The most noteworthy technical development is probably the formation of the “ISLAND” reversal pattern. It started with a gap up (there were actually 2 gaps) in mid February (blue boxes), and it completed the formation with a gap down in mid April (red box marked No. 1). Island formation is a critical market top indicator.

The first down gap (#1) happened around the time the 20-day moving average crossed below the 50-day MA, and the down gap 2 broke down right after the same 20-day MA crossed below the 100-day MA. The down gap 1 was accompanied by huge volume, which indicates huge selling pressure. The second gap down (2) was also accompanied by huge selling volume.

Both gap 1 & 2 were then filled when the up gap 3 occurred in mid May with largest positive volume since April 18. This tells me that $34-$35 support is a tough one to crack. I don’t expect it to drop below $34 without putting up a good fight. That’s why I went with the $35 call and not anything lower.

The $40 level where the down gap # 1 occurred also appeared to be a strong overhead resistance. The price gapped down from there (see # 4 gap) just last week with largest selling volume since May 12. And, this gap #4 still didn’t get filled yet. It would seem unlikely to have this gap #4 filled any time soon because this gap took the price down below all moving averages, except for the 200-day. 200-day MA is nearing $32.50 area.

My entry point is to make sure that the price didn’t shoot back up to fill gap #4 right away. This also means for the price to stay below $37.50, which happens to be below all 3 of the moving averages.



And, that’s what this 4-day, 10-min intraday chart told me today. It dropped below the 23.60% Fibonacci Retracement, which was at around $37, and stayed there for the rest of the session.

I bought Jan 2006 $35 PUT @ $3.60 as per my first Trade Journal post. I deleted that post just to remove the redundancy.



So, now we’ve got the play in place, and we’ll sit back and enjoy the game.

Incidentally, if you're wondering why the term "Island", here's why...