Another Bite of Apple

This column was originally published on RealMoney on Dec. 28 at 11:58 a.m. EST. It's being republished as a bonus for TheStreet.com readers. For more information about subscribing to RealMoney, please click here.

The other day, a regular reader asked me for my take on a couple of stocks that he was holding. Here's what A.F. wrote:

"I own very small partial positions in stocks like NYSE Group (NYX Quote - Cramer on NYX - Stock Picks), Sears (SHLD Quote - Cramer on SHLD - Stock Picks) and Goldman Sachs (GS Quote - Cramer on GS - Stock Picks). I know they are breaking down, but I plan on holding these for a couple of years, probably. Do you still think I should sell them and wait for better prices? I don't want to let go in case they begin back higher, although I think the market is about to turn down for the most part. The losses I would be showing if they dropped even 20 points won't be that bad since my positions are so small, so I am inclined to hold through the crappy times. What do you think?"

Although I gave my take on those stocks over the past few days, this question is a bit more complex than you might think. Everyone has different trading styles and objectives. My response was straightforward, but I'm not sure that I really answered his question. I said, "If you feel that they are going to continue to fall, why justify the anticipated loss on the basis that they are 'small positions'? Money is money. But the analysis is different if you really believe in the company's fundamentals (as opposed to focusing exclusively on the price action). With a two-year holding period, simply buy more when they fall."

If you pay close attention to my answer, I was really talking out of both sides of my mouth: Sell if the stock is going down... or buy more. That was a pretty wishy-washy response with minimal value. However, the point is that everyone buys stock for different reasons and according to different methodologies. That's what makes a market. With an anticipated two-year holding period, A.F. obviously likes the fundamentals of these companies. So he's not trading the stocks; he's investing in the companies.

Next, he holds just small positions in the stocks. Was his position size part of a plan, such as "buy some now and hope for a pullback to buy more"? If that's the case, then he's well advised to buy on this weakness and continue building his position. But if his "small position" was actually his normal position size, then he has a problem. Averaging down on a losing position theoretically makes you "less wrong" by lowering your cost basis. But that doesn't reduce your risk; it increases it because you are simply bigger in a losing position.

Everyone deals with price gyrations in individual ways. The best traders can articulate a methodology that speaks to impending pullbacks. They anticipate pullbacks and either sell, hold or buy more. What you do completely depends on your trading approach. Just make sure you spend some time on developing that approach according to your individual capitalization, ability and personality. Without a plan, every price movement brings questions rather than opportunities.

Let's look at some reader requests.

Apple

I've been highlighting Apple (AAPL Quote - Cramer on AAPL - Stock Picks) fairly regularly, largely because I receive questions about it almost every day. In my most recent column about it, I noted that the tag of the 50-day moving average presented a "low-risk" buying opportunity.

Sometimes I forget that readership is a dynamic thing, where not every reader is familiar with all of my prior work. Therefore, it's important for me to explain one critical aspect of my writing: A "low-risk" opportunity is when you can buy a stock very close to the level that, if hit, proves you wrong. "Low risk" is not synonymous with "no-brainer."

While Apple's stock fell below the 50-day moving average, yesterday's dramatic downside gap and reversal present a different "low-risk" opportunity. The heavy volume, combined with a strong close within a wide-ranging day (i.e., a larger trading range than usual), could indicate that many traders who had been hanging on to Apple over the past few weeks, hoping for a resumption of the uptrend, finally capitulated yesterday. The catalyst was more news on the options-backdating issue.

After the nervous bulls sold in the opening rotation, the stock traded higher all day. Things got a bit worse today amid reported revelations that Steve Jobs received stock options without board authorization and that the company later falsified records to show that the board had approved the grants. Today's close will be critical because it will indicate the true nature of yesterday's selloff. Was it really a last-gasp flush-out of weak hands, or simply a high-volume day of short-covering mixed with natural sellers? The bottom line is this: Yesterday's low needs to hold to establish a short-term bottom. The low-risk trade is to buy on this reversal, with a stop just below $76.77. That risks about 6%.

SPDRs

The SPDRs (SPY Quote - Cramer on SPY - Stock Picks) continue to confound the bears, making one higher high after another. I believe part of the reason why the market has been so confusing is that the uptrend has slowed a bit during November and December. I've drawn the resistance line that marks the highs between August and November; you'll notice how the SPY starts trailing away in early November. That gives the impression of an impending top. At some point, the uptrend will certainly end, but only liars know precisely when that will be. Yes, I see the declining peaks in the relative strength index, or RSI. Yes, the market looks very tired and in desperate need of a rest. But those are mere points of interest in light of the uptrend. Seasonality (while dismissed by some -- mostly bears) favors the bulls, and the long side continues to be the winning side. Perhaps next week will bring out the bears. But as long as the uptrend persists, keep snorting and avoid growling.

DivX

DivX (DIVX Quote - Cramer on DIVX - Stock Picks) has been cut by almost 30% since the November high, but the action over the past few days just might mark the bottom. Tuesday's test of $23 was followed by a reversal yesterday. Plus, check out the long price-by-volume bars at $22 to $23. That's where a great deal of trading has taken place, so it makes sense that a return to those levels will attract attention. If you are long, consider Tuesday's low of around $23 as a reference for setting a stop-loss. If the stock falls below that, then yesterday's reversal won't amount to much.

Banco Bradesco

Banco Bradesco (BBD Quote - Cramer on BBD - Stock Picks) has been trading within a fairly tight uptrend. The stock has not visited the 50-day moving average for almost three months, and price peaks continue to extend above the upper Bollinger Band. This is bullish action, and I'd remain long unless the stock begins falling below the 50-day moving average.

STMicroelectronics

Over the past couple of months, STMicroelectronics (STM Quote - Cramer on STM - Stock Picks) has been trading sideways within a tight range. I've drawn the current support and resistance lines. However, volume is really tapering off. Declining volume after an advance is a sign of strength because it indicates an absence of anxious sellers. Conversely, increasing trading volume within a sideways channel after a meaningful advance often indicates significant selling interest -- i.e., real distribution rather than simple profit-taking. So I'd look for a continuation of the uptrend, but I'd also keep a stop a bit below $18 to protect against a reversal.

Be careful out there.