Before you continue reading this post I want you to go over to the mirror, look at yourself, and repeat ten times….
“This is ONLY a trade!”
And what that means is that if this trade does not set up like I am going to describe it…..don’t take it.
And if it does set up, and you take it, and it fails, get out immediately.
And if it does set up, and you take it, and it makes you money, take the profit (and send me a case of beer).
Okay, now that we have that out-of-the-way….
$AAPL is getting to point where I believe there is going to be a “puke reversal” trade. I call it that because the hallmark of the trade will be a VERY large volume/price spike down on a 5 minute chart, which is basically all the amatures that bought the stock near all-time highs finally hitting their max pain point and “puking” out their shares.
Think of it this way. Remember that night where you were out at a bar partying hard with your buddies, and at some point you had a bit of “reflux” come back up to the top of your throat, but you ignored it and kept pounding away?
As the night went on your vision got fuzzy, your head started to spin, your stomach began churn. Then you left the bar, hopped in a cab, and prayed that you could make it home. But as the cab swerved around cars and broke hard at every light it got harder and harder not to lose your lunch. Finally the cabbie took a hard left and that was it. You rolled the window down and puked your guts out.
You did the Technicolor yawn.
You shouted at your shoes.
How do I know it is oversold? Well, it just feels oversold, but besides that there are some technicals that seem to be saying the same thing.
First off, $AAPL has been in a relatively tight channel on a closing basis since it’s all-time high was hit, and it broke out of the bottom of that channel on Friday.
Secondly, it is extremely extended from its 20 and 50ma, and broke below it’s 200ma on Friday as well.
Lastly, it is currently outside that bottom band of it’s Bollinger Bands.
All the above are signs that $AAPL is oversold and scream for a reversion type move, at least short term.
$AAPL has basically peeled off 125pts without any serious counter-trend rally, though it has “popped” for 25pts or so twice. I am not saying that $AAPL is not going to continue down further in the future, or that it’s going to rally back to its high, I am just saying that it is due for a serious bounce before it attempts either.
That being said, an oversold stock can stay oversold, and keep getting oversold longer than your account can stay liquid, hence the need to heed the specifics of this set up.
Okay, here is what we are looking for.
1. Gap down hard at the open Monday.
2. A massive volume/price spike down on the 5-min chart.
3. A reversal hammer on the 5-min chart (ideally a green hammer).
At that point you will be using that hammer to determine your risk/reward ratio on the trade. You will get long above the hammer and put a stop below the bottom tail of the hammer.
The question is often asked “how will I know when the volume spike is the ‘puke’ spike?”
You will know it because it will be so big that the volume bar will “re-scale” all the other volume bars on your chart. It’s kinda like pornography, “you’ll know it when you see it.” And it will most like coincide very closely to when $AAPL bulls are “panicking” because the world is going to end, and $AAPL bears are “gloating” because the world is going to end.
Once again, this is a very specific setup/scenario, and if the technicals that I outlined don’t line up, all bets are off.
For more on this type of trade read my post “5 Rules For Trading A Reversal Hammer.”
Brilliant stuff like this rains down like..well, rain, on my stream during the week. If you want to get wet, follow me on Twitter and StockTwits. You can also pick up my book Trading - The Best of the Best: Top Trading Tips For Our Times by clicking here.