A Potential Walk of Shame for Apple

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To follow-up on this analysis that I wrote ten days ago, shares of Apple have indeed broken below $390 after consolidating for several weeks. If you read that post, then you know that the “island top” reversal that Apple formed has been confirmed, even more now that $390 has been breached. Shorting Apple is a psychologically difficult thing to do for many traders, given the strength of their products and high esteem in which the firm is held, but those sentiments and facts merely serve to distract you from the current price action.

Accordingly, inside 12631 I initiated a short positon in Apple today with a fairly tight buy-cover stop back above $390.

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After yesterday’s sudden and powerful move lower, we are overall in the green today but not in a very convincing manner. Whenever the Nasdaq Composite Index, which is currently flat, lags the S&P 500 and especially the Dow Jones Industrial Average, it is usually a very short-term sign to me that the intraday action is not full of hearty risk appetite, due to the fact that the Nazzy is chock-full of marquee, growing names. That said, the market may have trapped some eager bears into yesterday’s plunge, and we could easily see a squeeze this afternoon.

Regarding the more intermediate-term posture, which is far more important to me as a swing trader, the S&P 500 found support right at yesterday’s lows. Beyond that, it is significant to see precisely where the buyers stepped in, which was in the 1220-1230 range, marking the very top of the prior multi-month parameters. A push below 1220, and the bears would have been prepared to inflict some more serious technical.

For now, though, this market is walking right up to but avoiding the inferno at all costs. The long setups that had developed in recent days obviously saw some setbacks to their charts yesterday, but stabilization today could quickly fix that situation.

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Whenever the Dow Jones Industrial Average plummets more than 400 points in a single session, it obviously trumps just about all attractive individual chart setups that had been forming recently. In essence, it is similar to when you were a kid, playing Super Mario Brothers and running out of lives in the upper levels. Despite the progress you made in conquering the various worlds, you still pressed the restart button to do it all over if you did not beat the entire game.

Similarly, when this highly volatile, news-driven market gaps down and trends lower throughout the day, it forces me to press the restart button on the various charts that I had been monitoring. That does not necessarily mean that the bears are back in charge on an intermediate-term perspective, as we are still above 1220 on the S&P 500 (the prior resistance from the past few months). However, as I write this I see that we continue to trend lower and 1220 may be in the bears’ sights after all.

Any way you slice it, today’s action is ugly and too monstrous of a sell-off for me to ignore. Accordingly, despite some charts still holding up well, I am going to reduce risk until further notice.

Inside 12631, member @TysonBrowning noted in our chat room today just how quickly the VIX spiked once it dipped below 30. I have been watching the volatility index closely of late, not to perform technical analysis or anything too rigorous on it, but just as general gauge of whether or not the wild and random price swings we have seen would subside. As you know, the VIX is nicknamed the “fear index,” as a proxy for the action in the options market and expectations of market volatility.

There are plenty of traders who follow the VIX more closely than I do, but my point is that volatility is stubbornly remaining elevated here. Equity bulls want to see the VIX not only sink below 30, but trend down below 20 too. In the past, after several months or quarters of a spiking VIX, we would often see a quick collapse as equities calmed down and began to trend higher. The time around, it is not so easy to short volatility and print a bunch of profits.

Beyond the volatility, the S&P 500 is still holding above the prior multi-month trading range, which to me is of the utmost importance. Hence, despite the waters remaining choppy the bulls are in hanging tough enough to not give up on them just yet.