PM: Finding support at 1540

By Jani Ziedins | End of Day Analysis

Apr 18
S&P500 daily at end of day

S&P500 daily at end of day

PM Update

MARKET BEHAVIOR
Stocks broke the 50dma and 1540, but didn’t trigger a wave of accelerating stop-loss selling.  Volume was above average, but less than Monday and Wednesday’s elevated levels.  Today’s slide was the fourth down-day out of the last five.

MARKET SENTIMENT
I’m surprised the market didn’t see more stop-loss selling when it broke recent lows and violated widely followed support.  There are two possible explanations.  Sellers saw this coming and exited before actually reaching their predetermined stop levels or complacent traders ignored their stops, preferring to wait for the expected rebound.  One is bullish, indicating most of the selling already happened, the other is extremely bearish because there is still a lot of selling to come.

TRADING OPPORTUNITIES
Expected Outcome:
The lack of stop-loss selling today makes a bounce more likely.  Support at 1540 encourages holders to keep holding and this limits supply in the market.  But I’m only looking for a bounce to 1570 before dip buying exhausts itself and selling takes over again, pushing us through 1540, and ultimately down to 1400.  This minor rebound would build the complimentary right-shoulder to April 2nd’s left-shoulder.  A day-trader could take advantage of these minor fluctuations, but the rest of us are better off sticking with longer time-frames.

Alternate Outcome:
The lack of selling under 1540 concerns me.  I still think a pullback is in our future, but the market might not be ready for it yet.  One possibility is a brief bounce before rolling over, but if most sold ahead of the expected crash, the market has already refreshed itself and is ready to resume the up-trend.  While not as sustainable as a demoralizing selloff, recent volatility is flushing buyers from the market and creating a pool of the next chasers.

AAPL daily at end of day

AAPL daily at end of day

INDIVIDUAL STOCKS
AAPL cannot find a break.  Today’s selloff pushed it under $390 and no one is interested in buying it no matter how cheap it gets.  The increasing despair felt by shareholders is actually constructive for finding a bottom.  The most loved stock needs to become the most hated before the selling will exhaust itself.  Only after everyone has left it for dead will the selling finally stop.  Recent weakness silenced the most rabid bulls and has them eying the exit.  The stock still needs to purge those hanging on from much higher levels and replace their hope with discipline from far more patient and longer-viewed value investors.  But this is the medium-term outlook for the stock.  The long-term outlook for the company will likely end far different from what most are predicting.

Some people criticize AAPL’s unfair comparison to MSFT and they are right, just not for the reasons they think.  While MSFT is boring and lacks the appeal and innovation AAPL is famous for, MSFT never faced any real competition and still has a 70% strangle hold on the PC market.  Compare this to AAPL’s fierce battle with Android and Samsung.  AAPL’s long since given up the crown to Android, it recently fell behind Samsung, and is on the verge of being outsold by the Galaxy S4.  If MSFT’s stock price was flat for the last decade with stable profit margins and 80% market share, how is AAPL going to thrive in a fiercely competitive and commoditized hardware segment?  While this selloff might finally bottom and bounce off $350, that is likely only a temporary floor for the stock as AAPL goes back to being a small niche player in a much larger market.

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About the Author

Jani Ziedins (pronounced Ya-nee) is a full-time investor and writer who has successfully traded stocks and options for more than a decade. He earned a B.S. in Mechanical Engineering from the Colorado School of Mines and an MBA and M.S. Marketing from the University of Colorado Denver. His prior professional experience includes manufacturing engineering at Fortune 500 companies, structural engineering, small business consultant, collegiate instructor, and managing investment real estate. He is now fortunate enough to trade full-time from home, affording him the luxury of spending extra time with his wife and two young children.

Randall Hardy April 19, 2013

I agree that Apple is facing fierce competition. But that is a double-edged sword. If Apple continues to only upgrade its current product mix, it could mimic Microsoft down the road. But, if it decides to get its rear in gear and get back to innovation mode, Apple could once again be a trend-setter. Apple needs to “dazzle us” like it did with the iphone.
Also, the Apple culture is a tenacious bunch. It does not migrate easily to competing products. That alone will help Apple’s cause as it finds its way.

    Jani Ziedins April 19, 2013

    “Dazzling us” is largely luck and why it is so hard for innovators to recreate the magic. AAPL is rare in that it produced three home run products, the iPod, iPhone, and iPad. The interesting thing is each was a derivative of the previous. The iPhone was an iPod with a phone and web browser built in. The iPad is mostly a large iPhone. How much further can they stretch this lineage? Is a smart-watch the next evolution? Probably, but will the masses line up to pay $600 in order to keep AAPL’s sales and profits growing a previous levels?

    AAPL doesn’t have a moat around its core business like MSFT and is unlikely to maintain dominance the way MSFT has over the last decade. With all its success, MSFT’s stock price has been flat. What will AAPL’s stock price do as it loses marketshare and margins compress?

    AAPL is in no danger of going out of business, but can a niche player demand the largest valuation in the world? The market no longer thinks so.

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