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3 Trading Outcomes for Apple This Summer

how-do-you-like-them-applesWhile the broad based indexes are spitting distance from new all time highs...

Things have not been as good in Apple land.

If you need to "blame" something, well you've got a long list.

Introduction of new competitors.

Poor iWatch sales.

Squeezing margins.

Whatever the case is, the big gap down that the stock saw after its earnings has probably priced in a lot of the bad news.

Yet, you can't just say the market is being completely efficient here.

If you can read the psychology of the market, then you can get a better edge in the stock.

AAPL Is Not A "Stock"

This may seem like a nonsensical idea, but AAPL really isn't a stock anymore.

(At least, you shouldn't treat it like one)

Sure, it represents the underlying shares of a company...

But that's not why many people trade it.

Think about it:

This is the most heavily traded, liquid stock in the world.

It's liquidity rivals many other broad-based markets.

In fact, we can go so far to even call it a mini-index!

AAPL has more in common with gold futures than it does other stocks.

It's more a source of liquidity and a store of value.

Think about it, if you're a fund manager that has a mandate to be invested 95% in stocks...

Meaning you can't hold a cash position...

You can't just park it in anything.

If you want to get in and out of an asset quickly, you don't want to have a bunch of slippage.

So what do you do?

You park it in AAPL... not just because you think the company is good (well, you still think it's good), but also you can sell your shares quickly without dumping the stock.

At some point the company matters... and we see that when the stock gaps around on earnings.

Have I convinced you a little bit?

This matters because the way you trade indexes and commodities is a little different than how you trade individual stocks.

Higher liquidity leads to more mean-reversion.

With that in mind...

A Look At The Chart

aapl

This is a weekly chart of AAPL.

If you could put this chart into a single word or phrase, what would it be?

Optimism? Sure doesn't look like it?

Panic? I don't think so.

When I look at this chart I see "impatience."

This impatience stems from a few areas.

First, we have the true believers in the company. They're invested for the long run and they actually care about the fundamentals.

Well, up to a point. Because if you aren't making money from it, the mood can easily sour.

Those fundamental investors are looking at a nasty gap down on earnings due to disappointing numbers.

And all those people who say they hate technical analysis... they're lying because they've got this exact chart pulled up, watching this level at 93.

The second group are the "liquidity" crowd, who use AAPL as a trading instrument and a way to "store value."

(In fact, I think AAPL and gold have a lot in common. Strong opinions held both in the bull and bear sides, and both assets only trend maybe twice a year. Food for thought...)

This liquidity crowd is growing impatient because AAPL stopped going higher.

I know it sounds stupid simple, but if you're parking your money in an asset, you'd like to see that asset rise.

And when stocks go down, liquidity tends to dry up.

I think the past few months has been an unwind of those who have used AAPL as a trading vehicle.

There's probably another few "profiles" we could build out in terms of who is playing the stock, but no matter what...

Everyone is looking at the 93 support level.

And what happens when everyone looks at the same level?

That's where I get my trade ideas from.

The 3 Trades to Consider

The first trade possibility is the failed breakdown.

aapl1

Because everyone is looking at this support level, it will have a higher initial failure rate.

Think about it...

If you're scared about a breakdown in AAPL, odds are you've already sold. You're not waiting for the actual break.

What ends up happening is the breakdown has no followthrough at all. Once investors and traders start seeing that in the tape, they pile on top of one another to reenter at a "better" price. This takes us back to 93 and probably a swift move to 100.

The second scenario is the all clear fade.

aapl2

In this case, the 93 level holds and we start to head higher.

The sentiment quickly shifts and the earnings gap gets faded. Complacency hits and we head back above 100, which is a big psychological level in and of itself.

If we bounce hard here, there will be a good shorting opportunity into that 100 level.

The third is what I would call a dip buy failure.

aapl2

If we get a clean break under 93 with proper followthrough, we'll find a point where all energy has been spent in the short term.

The first "dip buyers" will come in here, and hope for a bounce.

Odds are the first dip won't be the final move.

We'll need to wait for those dip buyers to get stopped out.

Into that stop out will be a great long term entry point on AAPL. I'd look at selling puts or doing a covered strangle.

It's Like Poker

The way to truly be successful at poker is understanding the motivations of the other players at the table.

The same holds true for stock trading.

Everyone has the same data.

Everyone has the same charts.

The way you win is taking it one step further and learn the motivations of the other participants. From there you can get better reward to the risk you take and build wealth over the long term.

by Steven Place

Steven Place is the founder and head trader at investingwithoptions.com/