EOD AAPL Update

This isn't just an AAPL update, but AAPL is one of the biggest bellwethers if not the biggest, out there.

Before the last re-wieghting of the NASDAQ 100, AAPL accounted for nearly 20% of the entire index, it had the same weight as the bottom 50 NASDAQ 100 stocks combined! If you want to know what NASDAQ's proprietary weighting schedule is now, you can always pay the $10k a year and find out what AAPL's real weighting is now, but I assume it's still way up there.

The AAPL Put position today didn't suffer too much at all, in fact as of the close...

 The position looks to have only taken a -0.20% hit, which is well within my tolerance when you are trying to let the trade come to you and time an options entry (which is different than an equity entry for a number of reasons, but time decay is certainly one of them).

 For a break out above a bull flag, it's curious that AAPL was up intraday about 1.5% and ended just above 1% on very average volume.

Now that we have some time being the market is closed, for newer members, I'll briefly touch on the head fake concept as AAPL is looking like it's going to give us one of the more rare, "Crazy Ivan" head fakes.

This all comes back to the fact that Technical traders are doing the same thing they have been doing for nearly a century, but when the Internet and cheap online brokers came along, there was a huge shift away from value/fundamental analysis and in to Technical Analysis, I think partly out of laziness. When Wall Street sees that Technical traders will react a certain way to a certain price pattern or break of a certain support or resistance level, they see the predictability of the reaction and it makes it very easy for them to use Technical Analysis against its practitioners which is nearly everyone now.

Above we have AAPL, a stock that a lot of traders LOVE, literally they love it; go on an AAPL message board and say you are short AAPL and see what happens, it's like a cult. In addition we have a bullish price pattern called a bull-flag, this is a consolidation/continuation pattern, meaning technical traders expect it to break out to the upside from the flag portion. If you want to trigger volume and make money on volume rebates (just read your brokers agreement, you'll see they make money for routing orders or volume ) one of the easiest ways is to send price below the bull flag and do something technical traders didn't expect. You can see on the day that happened volume swelled to 2Xmore than average at least because traders put their stops under the flag as that (according to hundreds of Technical Analysis books) was not supposed to happen. That huge supply of AAPL stock available from th sell-stops is easily accumulated by Wall Street, someone HAS to take the other side of the trade.

T.A teaches that if a pattern fails, then reverse positions and in this case, go short AAPL (I doubt many would in AAPL), so when price once again moves back in to the flag as it did, the shorts are stopped out as the bottom of the flag is typically their stop-lots of volume rebates/$ being made just from playing some simple games.

Ultimately though, we are back to a bullish flag and expectations of a breakout to the upside, some traders will enter just on the bullish pattern, others will wait for breakout confirmation which came Friday, but without a doubt today, so more longs enter. What's the easiest way to make more money now? Another shakeout with AAPL blowing the new long position stops, when a shakeout happens on both sides of the pattern, I call it a "Crazy Ivan" shakeout. When AAPL moved above the flag today and longs entered, that created demand that Wall Street can sell or sell short in to; there's a couple of reasons for a head fake move.

The last reason for a head fake move is the snowball effect or as a friend puts it, "From failed moves, come fast moves". Now, imagine AAPL crashes back below the $580 area (below support of the bull flag), a lot of stops get hit which creates a lot of selling (and volume rebates), shorts see the failed pattern and they enter (when you sell short, you sell so there's more supply hitting the market), the end result of all this supply hitting the market so quickly with no demand to soak it up is lower prices, it's simple supply and demand and usually it's a big/fast move. That's another reason, the snowball effect.

 If we look at the 3 min (intraday timeframe) chart, we see last Friday a small patch of accumulation, this certainly and probably came from Wall Street, a little something to send AAPL higher today, but not just higher, specifically above the bull flag where all these things come in to play. Once above the bull flag and longs are soaking up supply, Wall Street/smart money can sell/short in to that demand and I have a strong feeling that's what we are seeing with the negative divergence today, not demand, but selling or shorting in to strength, the exact same thing I want to do because it gives me a better entry and less risk than shorting AAPL below the bull flag at $575.

 Looking at the 5 min chart, the trend shows a negative divergence for a while, Wall Street's positions aren't like ours measured in 100 lots, they are huge and it takes time and supply to move in and out of positions without driving the market against your position.

 Here's our bull flag again with a 30 min 3C chart overlaid, how come there's no positive divergence in this bullish price pattern? In fact we have a negative divergence suggesting it was used by smart money to sell in to strength/demand. The only place there's a positive divergence is once the bull flag saw the first head fake move below the flag (at the white arrow) when volume doubled, that would make it very easy for smart money to accumulate shares on the cheap with lots of supply to send AAPL back up and above the flag, they can also make money on that little trip. It appears from the 30 min chart that they did sell in to that price strength as 3C is even lower although price is higher.

 I have said for a long time that I didn't expect to see any major accumulation in AAPL after we saw the accumulation at the white arrow at the far left at the price lows (again another area where supply would be abundant at cheap prices). It appears AAPL saw price/trend confirmation on this chart until prices were high enough, then we see the negative 3C trend in to higher prices, this would be selling in to strength, but a very large position. If Wall Street were to sell a position that big all at once they'd knock price down against their own position and lose profits, instead they do it a little at a time and the end result is a negative divergence like this that shows where they were active sellers, but unlike amateurs that place orders for everyone to see, Wall Street does this quietly.

 The Crazy Ivan shakeout? We have the downside head fake, we have the upside breakout, all we need is the breakout to fail, volume certainly didn't impress today for such an important breakout. This is why we want to understand the underlying trade, be patient and let the trade come to us, in effect, trading like Wall Street/smart money.

 The 60 min chart at the bull flag also shows no positive divergence in this bullish price pattern, but rather a negative divergence, again it looks like smart money was selling in to the bullish price pattern because technical traders are so predictable, they know that they will buy the bullish pattern. The positive divergence is on the downside head fake and it looks like those accumulated shares are being distributed as we have another negative divergence to the far right.

Here's a closer look at the same 60 min chart, note how the negative divergence really kicks in the last 2 days, the same last 2 days that price in AAPL moves above the bull flag, the area Wall Street knows that technical traders will buy. The volume isn't huge today in my opinion because the only buyers were retail in their 100 lot orders, it doesn't appear from volume, price action or 3C that smart money was buying this bullish move.

We'll see how this all pans out, but trading is all about seeing what the crowd missed and probabilities.