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Apple Down 8% - Could This Sink the Nasdaq?

Apr 03, 2012
Simon Maierhofer

Apple has created an economic ecosystem second to none. Never before has the entire stock market been as dependent on the performance of one single stock. This is a double-edged sword that could send the market soaring or spiraling down.

Apple is trading at an all-time high and for the first time since the late 1990s the potential for technical advancement seems limitless. That's why Apple and the tech sector (NYSEArca: XLK) have led the broad market to new recovery highs.

We live in exciting times, a time where companies create vast seemingly self-sustaining and self-perpetuating economic ecosystems. Like a coral reef that supports sponges, crustaceans, mollusks, fish, sea turtles, dolphins, sharks and much more, Apple and Facebook spawned into an economic life-giving environment (it could aptly be called iEconomy).

Apple (NasdaqGS: AAPL) is the single biggest component of the Nasdaq-100 (accounts for 19%) and S&P 500 (accounts for 4.5%). Never before has the broad market been as dependent on one single stock. Unfortunately, that's a double-edged sword.

An Apple a Day Keeps the Bear Market Away

Take “Angry Birds” as an example. Angry Birds is the most downloaded game (downloaded more than 700 million times) of the smart phone market. Angry Birds has all sorts of spinoffs; it sold 25 million flush toys, expects to open a theme park in Finland, has its own section at Walmart and even a Hollywood movie in the making.

The up side potential for Apple and Facebook seems endless and the sky is the limit for any of the “cleaner fish” companies benefiting from the new iEcosystem. MarketWatch just reported on March 27 that: “Technically speaking the Nasdaq Composite (Nasdaq: ^IXIC) has reached clear skies territory.”

From Angry Bird to Vulture

However, it’s a human tendency to rationalize why a certain trend should continue. In 2011, gold and silver were viewed to be an iron clad cure against inflation, deflation, stagflation and every other ...flation on the planet. In the end, it was gold and silver that deflated as the ‘worthless’ paper dollar rallied.

In the early 2000s, real estate was crowned with the title of 'never-losing investment' and of course there was a tech bubble that, contrary to all expectations, deflated in the year 2000.

Innovation leads to imagination but imagined corporate profits often lead to deflation. Nature’s ecosystems are subject to climate changes and extinction and past economic and investment lessons taught us that the economy is subject to the same risk. Popular Angry Birds could morph into vultures.

A Bad Apple Can Spoil the Bunch

Ironically, the up side is usually most limited when everyone expects prices to move higher and vice versa. Here are some recent headlines about Apple:

"Apple's stock gets first $1,000-plus price target" - CNBC
"Apple: The first trillion-dollar stock?" - Barrons
"Apple-mania spreads, Piper Jaffray sees $1,000 stock" - Reuters

Such giddiness is rarely a good buy signal. When blood is on the Street is generally the time to buy, such as in October 2011. On October 2, TheStreet proclaimed that the "S&P falls to the bears." The media declared a bear market only after stocks dropped some 20%. 

Quite to the contrary, the September 23 ETF Profit Strategy Newsletter foretold in no uncertain terms that stocks are about to bottom: "From its May high at 1,370 to its eventual low, the S&P will likely have lost about 300 points (22%). This validates a counter trend rally. The plan is to square short positions and buy long positions around 1,088."

Stocks have rallied more than 30% since (Apple as much as 80%), so now is not the time to buy, it's time to look for speed bumps.

Longer-term technical analysis is a very effective speed bump detector. The February 20, 2012 ETF Profit Strategy Newsletter looked at various long-term trend lines, trend channels and Fibonacci resistance levels for the Dow Jones (DJI: ^DJI), S&P 500 (SNP: ^GSPC), Nasdaq Composite (Nasdaq: ^IXIC) and Nasdaq-100 (NasdaqGM: QQQ) to identify speed bumps likely to cause a correction or reversal.

A key resistance point (or speed bump) for the S&P was 1,425 and 2,805 for the Nasdaq-100. The S&P got as high as 1,422, the Nasdaq-100 as high as 2,795.

Stocks have struggled since but have not fallen below key support. In fact, one momentum indicator I use particularly in a liquidity-driven market (percentR), has triggered various bullish low-risk entries in recent months (mainly for the S&P).

The chart below shows that the Nasdaq-100 triggered such a low-risk entry with yesterday's decline. The conclusion of yesterday's ETF Profit Strategy update was that the Nasdaq will bounce and close an open chart gap at 2,770.

             

It's too early to tell how high this bounce will go, but I believe that this little-known indicator (percentR) will also signal when a significant top is in place. How so? PercentR is designed to identify low-risk entry points with an associated stop-loss price (in the current case we are talking about buying opportunities). If such a low-risk entry fails (with a drop below the stop-loss price. This would be the first time in 2012) it would be strong indication that the party is over.

The ETF Profit Strategy Newsletter evaluates various technical, sentiment and seasonal gauges (including many largely unknown but effective indicators) to provide an easy to understand short, mid and long-term forecast. Most importantly the Newsletter pinpoints the support levels that – once broken – will foreshadow much lower prices.

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