These are a few stocks that I mentioned last night I'd be posting, they have been momentum favorites and major components of the market averages. I chose these 4 for a specific reason...
AAPL is the most heavily weighted stock in the NADAQ 100 as well as the NASDAQ Composite, BIDU has been a long term momentum crowd favorite and CAT is not only a symbol of American manufacturing, but the 3rd most heavily weighted stock in the Dow-30 Index. As for "P", this is probably the most hated stock I have seen from member emails, why? PCLN has burnt so many people who have tried to short it, it is the stock that doesn't seem like it will ever die and while I don't agree with retribution trades, I do understand the emotion behind them. PCLN is an example of a stock that seems invincible, no stock or market is so I've included PCLN to show you it is not invincible; as a matter of fact it is one of my equity shorts and it is green, although I do hope it will momentarily turn red so I can fill out the rest of my short position there.
In last night's post I put up a breadth chart, you can clearly see more stocks are falling behind even though the market is higher, it doesn't make sense unless you understand the weighting of the averages. There are 30 stocks in the Dow, they are not equally weighted, CAT is number 3, so you can easily have more stocks decline on a given day in the Dow, but still have the Dow green on the day if the top weighted stocks close green.
AAPL's weight is unknown unless you want to pay the NASDAQ $10,000 a year for a subscription, but in the recent past before they re-balanced, AAPL was weighted at about 20% of the NASDAQ 100, that was about the same as the bottom 50 stocks combined. So if AAPL is up, the chances are pretty good the NASDAQ is up, even if more stocks in the NDX-100 declined on the day. That is what had kept this market moving higher as more and more stocks were start falling apart. Many of you have heard this example before, but for those who have not, using the weighting of 20%, the same as the bottom 50 NASDAQ 100 stocks combined, if we took those bottom 50 and added AAPL and called it the NASDAQ 5, we could have all 50 stocks (excluding AAPL) down on the day averaging a 2% decline, which is pretty big for an index. If AAPL was up 3% for the day (which is pretty easy for AAPL), the NASDAQ 51 would close up +1% even though 50 of 51 stocks averages a 2% decline.
So we've seen a lot about the near term in the market updates, trying to get the best positioning in some of these monster stocks, but what many of the newer members haven't seen is why we want to be getting the best short positioning in these stocks.
Lets take a look at the bigger picture in a few simple charts for each...
AAPL has been flashing signs of trouble for sometime, but never this pronounced, AAPL's 60 min chart (which effects trends much longer than the 60 min would imply) has gone in to a VERY deep leading negative divergence, 3C is near the area in which AAPL was trading several hundred points lower and almost all of this occurred since March where AAPL has been in a top formation. Ironically, much of this damage started when hedge fund manager Dan Loeb no longer had AAPL as a top 5 holding, being hedge funds flock together, it likely sent many other hedge funds scrambling to get out of AAPL and I suspect that is why this 60 min divergence is so sharp, so quickly.
It wasn't long ago that a negative divergence first appeared on AAPL's daily chart, it was a sign of weakness, but I'm shocked how quickly it went from a small, but important relative negative divergence at AAPL's price highs, to a deep leading negative divergence. Daily charts don't often move this quickly and this deep. In addition, the price pattern is a perfect place to see such a monster negative divergence. Without AAPL being supported by hedge fund buying, there's no way (as much as AAPL longs are diehards) that retail can support the enormous market cap of AAPL. When AAPL dies, the market goes with it. Although you can probably imagine how hard it is for hedge funds carrying multi-billion dollar long positions in AAPL to get out of the stock without crashing it, it's like a game of Jenga, one wrong move, one sell order a bit too large, send AAPL crashing and the Hedge Funds return for the year crashing with it. This is a delicate dance, but one that is potentially life threatening for hedge funds and no manager wants to lose their Billion dollar contract.
BIDU was a great trade, we had an idea of exactly what it would do, it did that, we were able to take advantage of the head fake move higher while retail thought they were buying a bullish breakout and then BIDU failed as we suspected before it even started the head fake move.
The daily chart and cycle in BIDU from stage 1 accumulation to stage 2 mark up (the uptrend) to stage 3- the top and distribution and starting stage 4-Decline. Here's another daily 3C chart in a deep leading negative divergence, they aren't seen very often so admire it, take it in, we may not see many more charts like this in the future. 3C is at the area it was when BIDU was trading around $20!
CAT is showing a beautiful double top MoneyStream divergence, I have immense respect for MoneyStream and its creator, Don Worden who is the father of ALL modern money-flow indicators as he created Tick Volume, which set the precedent for a new breed of indicators. I love Money Stream for the accuracy of its signals, the problem is it doesn't give them very often and misses a lot of otherwise good trades, but when a signal like this appears, it's best not to ignore it-especially in a potential double top situation in which the target to the downside just about doubled.
This chart deserves to be seen with no annotations, to me it is that beautiful. The implications of CAT falling have dramatic implications for the Dow and therefore the entire market.
PCLN is flashing major danger signals just based on price action alone. The move in green, which showed increased volume as any strong trend should, was approximately a 550% gain. The yellow area is a caution as volume started to fall off, that period ended with a sharp correction (keep in mind this is a 5-day chart). The correction was approximately 35%, many traders view a 20% correction as a bear market and I can see how many traders were caught in PCLN's web. In orange, price became much more vertical, increased volatility on lower volume is not a good sign, however PCLN as a momentum stock was one of the primary beneficiaries of QE1 and QE2, therefore the values were supported by intervention, NOT fundamental value. Since 2009 and F_E_D intervention, there are very few stocks trading at fair value, they have been artificially pumped higher to create what Bernie called in Congressional testimony, 'The Wealth Effect". That may be true for Wall Street, but for the average American, it did nothing as disposable income is virtually non-existient and whatever there is has gone to staying afloat, not investing in stocks -for the majority of Americans. In reality Bernie just gave Wall Street and the banks a free ride, a golden parachute to raise money so he "hopefully" would not have to bail out another Lehman or Bear Stearns. QE has NEVER been proven to work, Bernie himself, before becoming the "Chairman" wrote a paper arguing AGAINST the effectiveness of QE and monetary stimulus, but as long as the government keeps spending (they have spent more in the last 4 years than in the first 200 years of government spending combined), Bernie has been forced to buy the debt issued that no other countries want will continue buying. In the red zone, PCLN ha gone parabolic, much like AAPL. PArabolic moves are huge changes in character and volatility and while they seem very bullish, they have historically been the end of the stock's upward sustainability and tend to fall just as aggressively as they went up. Volume is a picture perfect view of exactly what you don't want to see in rising prices.
Finally PCLN's hourly chart a it reaches the top of the parabolic move, notice anything? We are not the only ones who understand what a move like that means and Wall Street has used it to their advantage to move out of PCLN. There are two decent distribution zones and 3C marked them both as having seen VERY strong distribution. I'm hoping we get one more, but if not I have already used this price strength to enter a decent size short position in PCLN.
The end of PCLN's uptrend will be very discouraging to traders as this is the invincible stock, it will change market sentiment quickly as traders see Goliath fall.
I'll be adding more stocks, but I saw these 4 as key, each for their own reasons. Hopefully now some newer members see how quickly things have fallen apart in some of the top stocks out there. We have seen these warning signs for a while, but never so acute as now in such important stocks.
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