By February 2006, Apple had increased approximately 6-fold in the space of two years. The stock made an attempt to rally above $72 but failed. A scary decline ensued as the stock fell to the $58 level, but ultimately found support at its 200-day moving average. Then it rallied sharply to the $72 region once again, before enountering stiff resistance. Another bounce back up in May 2006 resulted in an intra-day spike above the $72 region, but ultimately a close below $72. And that last failure for Apple was the start of an even more scary decline. For two and a half months in May, June and early July, the stock slid until its July earnings report catalyzed a bullish reversal.
Within weeks the stock had powered higher, but didn’t have enough momentum to reach the $72 level and retraced close to $62. Another surge higher and finally in September of 2006, the stock broke above long-term resistance at $72.
In both May and September, the stock price spiked above the $72 level. The difference between the spikes was simply that in May the stock spiked intra-day above the resistance level but ultimately closed below it, while in September the stock closed above resistance. Moreover, subsequent to the bullish September close, the stock re-tested the old resistance level, failed to close below it and began a surge higher. The breakout had indeed occurred!
Why discuss the movement of Apple in 2006? Well, a principle that can work very well is knowing that traders of a particular stock tend to trade it the same way again and again. By spotting the patterns of the past and recognizing similar activity in the future, a great deal of money may be made!
For example, the gang at Stock and Option Trades have been following Apple daily for many years now and had seen the pattern before. As a result, it was easy to call the breakout when the stock finally spiked above the $130-$132 range recently, where it had twice failed in February. Note the similarities between the failed breakout in late February plus the actual breakout in March and the previous action in 2006. In late February, the stock popped up above the $130 level intra-day, but significantly, closed below that level. In March, the stock closed above resistance, re-tested resistance just as it had done in 2006 and began its March higher.
Within days of the breakout, the stock had run up $10, leading the gang to comment:
"Apple led the declines earlier in the year and formed a fantastic base which allowed us bank profits on our March 115/120 bull put. Today’s move continues a classic breakout pattern."
Indeed, the stock has been tracked regularly in daily blogs, highlighting the near-perfect chart action. Almost every pullback has been a buying opportunity on the way up to its current lofty levels, even the scary dip at earnings!
Apple has had a habit of roaring higher, pulling back scarily and surging higher once again. On each occasion, the weak holders have been flushed out and the rotation of wealth from those who can combine technical and fundamental due diligence successfully with those who simply follow price action independent of context has continued.
You don’t need too many big winners like this in the course of year to have an outstanding year. So, by following stocks diligently over time and spotting trading patterns, you can more easily identify when opportunities present in the future, and you can have a VERY successful trading career!
Have a great weekend!
Optionsage!
