Apple Bottom and Call Buy Alert

NEW YORK ( TheStreet) -- No sane person wants to go long Apple ( AAPL) right now. They say it's a broken stock, toxic waste, a money pit. The hedge funds left the building months ago, they were equipped with first-rate smoke detectors and evacuation plans.

The retail traders hadn't a clue. They thought this building was unshakable, unbreakable. Now they're trapped and can't find the fire escape they never thought they'd need.

The little guy, the retail trader, is always the last to hop aboard a rising stock, grabbing only the last 10-15% of gains before topping out, and the last to get out as things crumble, and so they bear the brunt of the decline.

When things get really bad, like now with Apple down 40%, retailers are hoping to salvage what little capital they have left. Unfortunately, hope is not a strategy. The big players, hedge funds and institutions, they're all strategized up, and are more than willing to help retailers out of their predicament, happy to unburden them of those diminutive Apple shares.

So, how do the big boys do it? How is it that they consistently outperform the retailers? Is it because they have superior information, money to manipulate the system, the discipline to run sophisticated strategies, experience? Yes, of course, all of that, and more. That's why they are called the smart money, and hold a huge advantage over the little guy, the dumb money.

There are ways for a retailer to level the playing field to some degree, but they can never match the big money resources. At the very least, an individual should gain a basic understanding of how markets move and how mobs behave. Markets move in cycles and waves, patterns emerge and with the guidance of an experienced and talented technician, you just might gain an edge. But don't get full of yourself, because if you're like most people, you'll eventually give back whatever you take in.

So, I provide this Apple alert with the caveat that I take no responsibility whatsoever with how you choose to use the information. It's strictly for your entertainment. I suggest you paper trade what I'm about to tell you, learn from the techniques, and if you become a paper millionaire, you can send me a tip. Some sage advice will do.

If you are a student of Dow Theory, have a solid understanding of Fibonacci ratios and Elliott Wave principles, then the price action of Apple over the past nine months isn't so surprising. In fact it is exactly as one should expect.

So, in the same manner that I called the bottom of the S&P in 2009 to the dollar, that fateful price of 666, a call made a full five months prior (Nov. 10, 2008), I'm going to call the bottom of Apple in the spring of 2013 using similar methods.

The analysis is very simple. Apple's long run up to its high price of $705, was the first wave of a super cycle. The current correction is wave two of that super cycle, the first two components of a five-wave cycle. So far, they are picture perfect.

Wave one is comprised of five waves up, with wave three a perfect Fibonacci ratio of 1.618 times the length of wave one.

Wave two is comprised of three waves down, referred to as A-B-C. The A wave and C wave should be equal in length. Given those requirements, wave two will bottom at 390, plus or minus a point or two.

So far the waves are performing exactly as the Elliott Wave Principles dictate. The 390 level is also exactly a 50% retracement, a natural golden ratio.

This is where you place your buy order. It's where we expect the bottom to be, the beginning of a third wave up, the extent of which is typically 1.618 times the length of wave one, so it may be a long ride to the upside. In this case, the length of wave one is 627 points, therefore the wave three target is:

627 x 1.618 = 1014 added to the bottom 390 = 1404

The third wave is the strongest and longest of the five wave form, often referred to as an impulsive wave. This is the golden egg.

The strategy we recommend is to sell calls all the way up to the target, thereby protecting the downside and increasing your potential profit to the upside. That is all.

-- Written by Ernie Varitimos, author of the Apple Investor blog.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.
Ernie Varitimos has a long history with Apple as an investor, trader and consumer of its technology. He started his career as a rocket scientist and has spent the past 25 years driving, controlling and influencing technology in the financial industry. Ernie is a former hedge fund manager and current futures trader.