On January 2, 2013, Apple (AAPL) hit $555 and came within $4 of a downward sloping 50-day moving average (DMA). From there, the stock faded hard and closed at $549.03. AAPL has yet to set a new intraday high this year. On (Black) Friday, November 29th, AAPL came within 6 cents of equaling its intraday high of the year. The close at $554.85 is the highest close of the year, giving AAPL a year-to-date gain of 4.3%. This upside pales in comparison to the S&P 500’s (SPY) gain of 26.7% for the year or the NASDAQ’s (QQQ) even more impressive 34.4% gain on the year. However, having a gain at all has to be a relief for hardy AAPL fans who have held on through a very trying year.
AAPL is up 7.7% since neatly retesting support at the top of the January post-earnings gap down. The path upward has created a breathtaking 7 days. It has also taught me more lessons on trading AAPL day-to-day. I was much too slow in responding to this upward momentum even as the Apple Trading Model (ATM) kept projecting up days through most of the run-up. The problems all started with my bearish interpretation of the Bollinger Band (BB) squeeze on November 20th.
On November 21st, the very next day, instead of follow-through selling, AAPL gapped up, sold down to retest support one more time and then closed at the highs of the day. That was my opportunity to realize that this BB squeeze would not resolve to the downside like the BB squeeze from two months earlier. Lesson: there is nothing certain about the direction of the resolution of a BB squeeze. Either play both sides and/or prepare to nimbly adjust expectations based on responses to natural technical levels.
Earlier this month, I enhanced the AAPL trading model to provide TWO projectios: the odds for upside from the the close of trading AND the odds for upside from the open of trading. A friend of mine encouraged me to make this change. Beforehand, I would sometimes finesse my trades by looking for opportunities to fade the open when it moved in a direction opposite to my projection.
Unfortunately, my first application of the intraday projection was misguided. On Monday, November 25, AAPL gapped up and traded higher at the open. My model projected only a 50% chance of upside from the open, so I bought put options for a fade as a flyer. This worked for a few minutes before AAPL firmed up and closed the day higher (recall AAPL tends to have strong Mondays, so my trade was doubly misguided!). Lesson: never trade on flyers and only trade on definitive odds.
For reference, here is what the model projected for this past week of trading for upside (note well that the model does NOT take into account holiday trading or shortened trading days):
Mon, Nov 25: From the open – 50%; from the previous close – 90%
Tue, Nov 26: From the open – 64%; from the previous close – 64%
Wed, Nov 27: From the open – 93%; from the previous close – 60%
Fri, Nov 29: From the open – 17%; from the previous close – 93% (used data from Wed as if it were from Thu)
Mon, Dec 02: From the open – 17%; from the previous close – 36%
AAPL was up every single day of the week with gains of 0.9%, 1.8%, 2.4%, and 1.9% from the previous close. This week was so strong that even buying at the open produced impressive gains: 0.5%, 1.8%, 1.8%, and 1.2%. This week should have been a crowning achievement of the ATM even with the incorrect projection for Friday’s close! Adding to the execution problems was the speed at which AAPL raced upward from the open. Only a machine could execute option trades at good prices with that kind of action!
Now, AAPL has closed above the upper-BB three days in a row. This action confirms the strong momentum, but it also suggests the stock is very overbought (stochastics are now overbought – not shown in the chart above). So the irony is that I am looking at the bearish projection for Monday with a mix of anticipation and hesitation. I went ahead and bought put options, but I am mindful that this trade goes against the typical behavior of strong Mondays for AAPL. Moreover, I suspect the near manic rush to buy AAPL this week was to get in ahead of some big news come Monday. Time will tell as always.
For reference, I have updated the regression trees for the current Apple Trading Model, including the charts for trading off the open (called intraday). I only used the data for 2013 for the above predictions. To review the details and description of the Apple Trading Model see “ATM: The Apple Trading Model Refined.” As always, I eagerly accept feedback and suggestions for enhancements and improvements to the model.
Be careful out there!
Full disclosure: long AAPL shares and puts