RealMoney Silver - Apple Poised for a Bounce

Apple Poised for a Bounce
By Alan Farley
RealMoney.com Contributor
9/10/2007 10:32 AM EDT

In a column last week I noted the likelihood of a reversal near the Aug. 8 pivot highs and subsequent downthrust that would confirm the development of a trading range.

That decline began right on schedule Wednesday morning and gathered momentum after Friday's labor report revealed the weakest job growth in four years.

Big tech abandoned its leadership post during the selloff, with just six components of the tech-heavy Nasdaq 100 closing higher after Friday's 88/12 down-to-up volume event.

The biggest losers of the day, however, were small-cap stocks, which got dumped ferociously by nervous investors looking for safer havens.

The sharp downturn in the iShares Russell 2000 Index Trust (IWM) marked the fifth time in four weeks this fund has rolled over at resistance above $80. I've outlined my general bullishness on this small-cap index and am still looking for an eventual breakout through that key level. But first we need to see firm support develop above the selloff low at $73.24.

The broad pattern shows no gaps to fill, but there could be strong magnetism for price to surge toward a test of the big low. Honestly, I'd rather see buyers come in above that level, but there aren't any guarantees in this wicked tape. In any case, there's no need to jump the gun here, so let's sit back and wait for the instrument to show its hand.

It's hard to be outright bullish or bearish on the broader market after last week's turn. The Nasdaq averages rolled over above their August highs, while the S&P 500 and Dow Industrials sold off just below similar levels. This has triggered a notable divergence that's likely to yield trapping reversals as one side, or the other, overplays their hands.

The S&P 500 shows two lower highs off the July peak. Normally this would set up a test of the August low, but I don't think this is going to happen. First, the index came within striking distance of last month's high, missing it by just eight points. Second, the better-performing Nasdaq averages confirm there's hidden strength in this September market.

So the most obvious outcome would be a persistent trading range that rewards moderation and punishes those expecting financial nirvana, or Armageddon, in the next four to six weeks. Alternatively, this should mark a good period for swing traders buying weakness and selling strength within the developing sideways market.

Also note, the S&P 500 still hasn't traded below the Aug. 28 low pivot. That means it could still print a higher low that yields a quick burst up and over the August high. In turn, this would eliminate the current divergence between the major averages and support an eventual recovery back to the multiyear highs in all indices.

But let's consider first things first. There are profitable trades setting up in this fear-driven environment. This should generate excellent entries, but firm risk control will be needed to take profits off the table when they need to be taken. That requires turning off the financial tube and not getting caught up in the emotional rollercoaster ride.

Big tech stocks were top performers in the August recovery, so it makes sense to play these instruments during bounces within the trading range. Obviously many buyers are looking at these issues right now and salivating at lower prices posted during the selloff. At some point, their urge to buy will be greater than their urge to preserve capital.

In this regard let's take a look at Apple (AAPL) and its most recent downturn.

Longtime readers know I cringe at the over-attention given to this single instrument, but a good pattern is a good pattern. The stock is now grinding through a broad trading range between $115 and $150. Last week's decline dropped price by 16 points from high to low, with the instrument settling at the 50-day moving average at week's end.

There's a good long-side trade setting up here. The trick is to wait for support to develop between the two lines I've drawn. This four-point zone has held price on multiple tests in the last six weeks, although it did break for eight days in August. Ironically that breakdown now makes $127 to $131 a very good place to go long.

The failure of a failure -- that is, Apple's burst back above those support-resistance lines on Aug. 22 -- issued a strong signal that tells traders to buy all dips back to that price zone. For obvious reasons, keep stops under that pivot in case of a secondary breakdown, but the odds predict the level will hold up and yield a fresh bounce.

At the other end, I don't believe traders can play for a rally above last week's high. Instead, look for a retracement that fails between $137 and $140. The upper end is especially attractive if stock weakness persists into the start of triple-witching options expiration later this week. That round number could be a strike magnet during the next bounce.