When it comes to technology stocks, most investors will eventually bring Apple Inc. (NASDAQ/AAPL) into the conversation. There are two ways to look at technology stocks; one method is through fundamental analysis, while another is through technical analysis, using it to get a better understanding of what’s really happening behind the headlines with the large flow of funds.
I have discussed Apple several times over the past couple months. In my article “Don’t Trade Apple Until You Read This,” I used technical analysis to determine that if Apple were to break below $625.00, the best trade would be shorting it until it reached its 200-day moving average (MA), which was $579.00 at that time.
This is exactly what occurred, as Apple’s share price broke down below support, it did indeed hit my target of $579.00. At that point, I wrote a follow-up article, “Apple’s Shocking Drop in Market Share; What It Means for the Stock,” in which I stated that I would close my profitable short position and wait for the stock to form a base, using technical analysis to evaluate a new position before entering into another trade.
During this last article, I also made my readers aware of various other technology stocks that have gained market share against Apple. One of the benefits in using technical analysis is that it alerts you to shifts in the underlying trend prior to them actually affecting the income statement. With the landscape amongst technology stocks rapidly and dramatically changing, the smart money is usually ahead of the curve. This is why I like to use technical analysis on technology stocks, as the large institutions leave footprints that we can see on a chart.
Chart courtesy of www.StockCharts.com
The 200-day MA is extremely important in technical analysis, irrespective of whether we are looking at technology stocks or firms in another sector. Following the closure of my short position at $579.00, I suggested waiting to see what the large institutional funds were willing to do. At this point, they could have resumed accumulating Apple stock, driving it back above its 200-day MA.
We have now seen a technical analysis failure for Apple, as the stock tried but could not exceed its 200-day MA. This could be a sign from institutional funds indicating that they believe other technology stocks are encroaching further into Apple’s market share. This could also be an indication that the holiday season could be weaker amongst technology stocks than some expect.
Regardless, what is clear from my technical analysis of Apple is that a failure such as this presents another shorting opportunity at current levels below the 200-day MA, using that as a stop level. A sustained break below $525.00 is extremely critical in technical analysis. If Apple were to break below this level on a sustained basis, it is possible that the stock could decline to approximately $440.00, which was the level of the initial gap up in late January. A move back above $605.00 would negate this short strategy.
Technology stocks continue to innovate and make inroads into Apple’s market share. Apple itself is not expensive on fundamental metrics. However, because institutional investors conduct so much of the trading, there are large levels of funds flowing into and out of the stock that can create profitable trading opportunities. By using my own technical analysis interpretation, I’ve been extremely successful in trading not only technology stocks such as Apple, but also many markets around the world.