A major gauntlet dropped on the stock market. Apple (AAPL) soared as high as 3.2% but closed at just a 0.3% gain. AAPL broke out to a new all-time high last week in the middle of a swift 8-day run-up. In that time, AAPL bounced off support at its 50-day moving average (DMA) (the red line below), gained 8.6%, and thus left me no room to execute the Apple Trading Model (ATM). The sellers finally showed up in the form of a fade from the intra-day all-time high. The technicals look like a blow-off top that comes from exhausting the remaining motivated buyers. Accordingly, this fade spoke volumes.
Per the technicals of a fade that forms a blow-off top, AAPL becomes a short on follow-through selling. Only a close above the intraday high can invalidate the bearish signal.
AAPL’s fade served as the loud confirmation of other topping signals wrapped up in various types of fades and reversals. The NASDAQ (COMPQX) gapped higher, rallied to 16,200, and then faded into a 1.2% loss on the day.
While the NASDAQ looks toppy, the uptrend in the 20DMA (the dotted line above) still defines strong support. If that support breaks, then I will expect an eventual test of the uptrending 50DMA support. The reversal caught me buying a call option on QQQ in anticipation a garden variety micro pullback.
Last week I got caught leaning the wrong way with a call option on iShares Russell 2000 ETF (IWM). The selling in IWM confirmed the end of what is now a false breakout. I will now stop out my position and salvage any remaining value.
The Trade
As bad as all this looks with odds favoring more downside, I am not yet motivated to flip bearish from my neutral short-term trading call on the stock market. As described above, the NASDAQ has at least two near-term supports to soften the blow from a pullback. Apple has nearby support from its former all-time high set in early September. For now, IWM’s worst fate seems confined to returning to the former trading range that dominated 2021 price action. Accordingly, I prefer to stay on the fence and remain open-minded about the near-term prospects. Definitive 50DMA breakdowns would make me more sympathetic to the bearish case.
In the meantime, I DID go ahead and fade the iShares Expanded Tech-Software Sector ETF (IGV). The steep selling in IGV convinced me to follow the warning signal from the plunge in software stock Splunk (SPLK). IGV should linger around its 50DMA support, but I fully expect that support to give way eventually.
Be careful out there!
Full disclosure: short IGV, long QQQ call, long IWM call