Rebel Traders – Analysis Without The Hype

Let’s take a look at Apple (AAPL). Of course yesterday Steve Jobs unveiled the latest gadget and this one is called the iPad. During the day yesterday the stock reacted positive when the price point of the new device was announced, but, will it be a new hit?

Not according to the stock performance today. Apple lost a little over 4% today, even with the new product being touted by some in the media as the greatest invention since sex. My impression is somewhat less enthusiastic, but that is neither here nor there. This is a chart analysis of Apple (symbol: AAPL).

The chart that accompanies this article is annotated with numbers, each number points to a specific point on the chart where a significant event took place. Let’s examine these points.

(The chart shown is a 2 year chart, daily scale).

Point 1 – Apple was trading within a channel (blue lines) since May 2009. In early December Apple dropped below the channel. This was the first significant event as the break from the channel pattern signaled a shift in the dynamics of Apple’s stock.

Point 2 – Apple’s share price dropped to a major support level (horizontal black line) which was $189.50. That support level held Apple’s share price from dropping any further.

Point 3 – Apple moved up off the support level and re-tested the channel once again. This time the channel acted as resistance and the share price was held from going higher at this resistance level. This is a classic technical pattern of what was a support level (point 1) turning into resistance and that resistance level holding.

Point 4 – The major trend line (diagonal red line) was broken and Apple’s share price dropped below that trend line. This is another significant technical event for the stock price of Apple.

From a chart analysis point of view only, it now appears that Apple will be trading in a range between $189.50 and the trend line (red). Currently that would give us a trading range of approximately $30 (189.50 to $220).

It is what happens when Apple makes a move either above or below these price points that will give us a clue of where the Apple stock price will go over the months to come. Should Apple break below the strong $189.50 support level, then it is likely that Apple will see a rapid drop to around $175. At which time a new set of support and resistance points would have to be evaluated for where it goes from there.

If Apple breaks above the trend line (red), then it will run right back into resistance again at the previous channel (blue lines). At that point the share price will be caught in an even narrower range between support and resistance.

At this point in time, the chart tells me that Apple is likely to, at a minimum, re-test the major support level at $189.50. Short term traders may look at that support level for an entry (long) to play a potential bounce, albeit still contained in the trading range of 189 to 220. But, be very careful, should Apple fall below the major support (horizontal black line) then you may very well see lower prices for Apple ahead.

disclosure: no position in Apple (long or short).

Apple, the famed Iphone and Ipod maker has been on a rip ever since the apparition of the Iphone 3GS, rising to never-expected levels in a recession. Now, it has received a great helping hand from the FASB, the accounting institution of the US, which allowed it basically, to book as actual the revenue to be received from an Iphone subscription upfront.

Until now, Apple distributed the revenue from a subscription over 8 quarters (the typical duration of an Iphone subscription), instead of accounting for it upfront (which makes sense if  you think that the funds will come in over eight quarters). Now, under this change of accounting rules, Apple could recognize up to 95 % of the value of the Iphone upfront. Not indifferently, the Cuppertino firm lobbied hard for this rule, even if in accounting principles, it does not make sense in my view, in counting in your income revenues that have still to be perceived.

The estimation of MS’ analyst, Kathryn Huberty is that this could boost further the stock price of Apple, based on the recognition of a lower P/E than originally expected. What does this teach us? Never short a “cult” stock based on TA! There will always be ways for it to surprise you on fundamentals.

The Financial Accounting Standards Board (FASB), the organization empowered by the SEC to set accounting standards in the United States, is set to vote Wednesday, Sept. 23, on rule changes that could significantly affect Apple’s (AAPL) reported earnings and stock price, according to a report to clients issued Tuesday by Morgan Stanley’s Kathryn Huberty.

The new rules — for which Apple lobbied heavily — would put an end to iPhone subscription accounting, a balance-sheet sleight of hand that has confused analysts and investors from the day the iPhone hit the market.

Although the changes won’t affect Apple’s cash flow, Huberty sees short-term benefits “from a technical and sentiment perspective” including (in her words):

1. Inflows from quant driven strategies and retail investors as AAPL shares will screen cheaper on “New” GAAP consensus estimates vs. “Current” GAAP (19x vs. 23x);
2. Likelihood of larger earnings surprises given analysts have consistently underestimated iPhone gross margins which have ranged between 50-60% over the last year.

The bottom line, she writes, is that the new rules allow Apple to recognize the majority of the revenue and direct costs of an iPhone upfront (she estimates 95%), shifting value from the balance sheet to the income statement.

Although the rule change will affect many technology companies, Huberty points out, it is particularly relevant for Apple since the iPhone, which is subject to current subscription accounting rules, represents approximately 33% of its revenue.

The rule changes, if ratified, wouldn’t become mandatory until Dec. 2011. But Huberty believes that Apple will begin implementing them in their first fiscal quarter of 2010, which begins next week.

A Mad Money report on the proposed rule changes last Tuesday sparked a rally that sent Apple shares up nearly 10.8 points (6.1%) to a 15-month high of $186.79 before it ran out of steam. The stock closed Monday at 184.02.

Interesting development in the case of the exploding Iphones and Ipods of Apple (AAPL), which we considered in a previous post.

The European Union is in charge of many aspects of product safety in Europe and according to the French economic daily Les Echos, the European Commission (the quasi-executive organ of the EU) invited Apple to provide information on the case of a French teenager who was wounded in the eye by the explosion of his Iphone’s screen.

Similar details were requested from France and the UK where a number of incidents were reported.

Apple stays mum for now. “We invited Apple to give us information on the French incident, but for now we did not have any answer” regretted the spokesperson for the Industry and Companies division of the European Commission.

No wonder about that, considering how Apple is trying to shut down any information about the dangerosity of its products and considering the huge cash inflow it is getting thanks to this overpriced product:

Apple blew past all but the most bullish predictions in the fiscal third quarter, driven by sales of 5.2m iPhones, more than seven times the volume of a year earlier.

The sales figure is all the more remarkable because the period ending June 27 took in the introduction of the Apple 3GS and the halving of prices on the older 3G models, to $99, with both occurring in the last month of the quarter.

The surge shows how Apple has continued to gain share in the profitable market for internet-capable telephones, which is maintaining overall, albeit at a slower rate.

According to the spokesperson, the incidents were not yet notified to Rapex, the European alert mechanism for dangerous products.

In fact, in the wake of these incidents, Apple published a note on “environmental temperatures acceptable for the original iPhone“:

To ensure iPhone maintains a safe temperature, use it in a place where the temperature is always between 0° and 35° C (32° to 95° F).  Low or high-temperature conditions might temporarily shorten battery life or cause iPhone to temporarily stop working properly.

When not in use, store iPhone in a place where the temperature is between -20º and 45º C (-4º to 113º F). Don’t leave iPhone in your car, because temperatures in parked cars can exceed this range.
When you’re using iPhone or charging the battery, it is normal for iPhone to get warm. The exterior of iPhone functions as a cooling surface that transfers heat from inside the unit to the cooler air outside.

Previous incidents involving overheating seem linked to a faulty Lithium-Ion battery conception.

If the incidents are shown to be really widespread, this could lead to huge financial consequences for the Cuppertino company. The real question now is who is going to “think different” about Apple and realize they are selling overpriced junk?

Not English-speaking medias, in any case, as the news was widely absent on Saturday morning from the main financial medias that are the Financial Times and the WSJ.

When looking for stocks that offer the best risk to reward (long or short) a trader will take into account many things.

First is the broad market. And in a bear market rally all price advances have to be put into question for sustainability. When a bear market rally appears to be about to make another direction change (as viewed in the major indices) then stocks that are closing in on significant price resistance levels are candidates for trades. And evidence is building of an imminent move back down in the broader market.

In this case I chose to go ’short’ on Apple (AAPL).

The following charts will detail my logic for having entered into a short position in this stock.

The first chart is the all important ‘volume must confirm price‘. When you spot prices advancing at the same time volume is declining, then a trader must be suspicious of the price advancement. Upward price moves with declining volume must always be viewed as a ‘bear market rally’. In other words, less volume is supporting the price as it goes higher making for an unstable rise.

Next on this same chart is a gray rectangle. This represents a region that has significant price/volume levels. At each point where price has interacted with this price level (gray rectangle) the amount of shares (volume) that was traded at that price level is high. This reinforces the importance of the price level, and in this case resistance.

The next chart is a Fibonacci price level analysis applied on a multi year chart. Here again we see another form of resistance.

Up next is another Fibonacci study, this time it is a Fibonacci Fan sequence. While not one of my primary technical tools, it still reveals a pattern that has shown to be repetitive. Observe each fan line where it meets price. A significant amount of price reaction at each Fibonacci level is clearly visable in this chart.

And yet one more Fibonacci study. This one is a Fibonacci time sequence. Again, not one of my primary analysis tools but when there is a corelation to price/trends it has to be respected.

And the last chart shows a trend line spanning many years. While this is ‘not’ a primary trend, it is a price trend line nonetheless and it also reveals a potential price interaction level.

So there you have it. The primary factor in my decision to short Apple was the first chart, the remaining charts just give some added confirmation to the risk/reward ’setup’ being in my favor at this time.

While no trade is ever perfect, or will go as planned 100% of the time, the charts tell me that there is an overwhelming amount of evidence that being ’short’ offers the better risk/reward trade at this price level.

Apple (AAPL) reported this afternoon that their earnings for the quarter that just ended beat Wall Street estimates by a large margin. I’m going to do some ‘digging’ into the numbers reported by Apple in the near future to get at the heart of their numbers.

Unemployment is rising by the day, people are losing their homes more and more to foreclosure, retail sales are down by record amounts, retail establishments are closing their doors, and Apple has their best quarter ever? Wow, I guess every man, woman, and child is spending every penny left in the piggy bank on iPods even as they lose their home and job.

The earnings from Apple create a disturbing scenario, we have Apple at one extreme of the retail spectrum, and the rest of retail at the other end. On paper it looks like an over stretched rubber band. If I were to place bets here I would put my money on Apple reaching an over extended quarter to only see retrenchment in quarters to come.

I know, Apple lovers out there will crucify me nine ways to Sunday. But, I keep my eyes open and don’t see how this earnings growth can be maintained in the grand scheme of the economy with the rest of the retail sector continuing to deteriorate.

(read more…)

I need to get on my soap box tonight. So much has happened today that I need to speak out here.

I’m not sure where to begin. First we received the Government data on retail sales and it was just as bad as I expected. But, it was a shock for the market because the data was below the ‘consensus expectations’. I have written for numerous months that retail sales were going to deteriorate and now we are getting the proof of that.

DECEMBER ADVANCE RETAIL SALES: -2.7% V -1.2%E; LESS AUTOS: -3.1% V -1.4%E
- Prior Advance Retail Sales revised from -1.8% to -2.1%
- Prior Less Autos revised from -1.6% to -2.5%

And at the same time came news of another retailer forced into bankruptcy. Gottschalks, a company with a 104 year history had succumbed to the economy and was forced into bankruptcy.

Next came the huge news that Nortel Networks (NT) filed for bankruptcy protection. Nortel was just a decade ago one of the largest companies in the technology sector. Today they are in bankruptcy and their stock has been wiped off the map.

(read more…)

Shares of Apple (AAPL) were halted for nearly 60 minutes following an announcement that CEO Steve Jobs will be taking a medical leave of absence.

JOBS NOTES HEALTH ISSUES MORE COMPLEX THAN THOUGHT, WILL TAKE MEDICAL LEAVE OF ABSENCE UNTIL JUNE
—Tim Cook, COO, will take over until Jobs returns

— Jobs’ Memo: ” I am sure all of you saw my letter last week sharing something very personal with the Apple community. Unfortunately, the curiosity over my personal health continues to be a distraction not only for me and my family, but everyone else at Apple as well. In addition, during the past week I have learned that my health-related issues are more complex than I originally thought.
In order to take myself out of the limelight and focus on my health, and to allow everyone at Apple to focus on delivering extraordinary products, I have decided to take a medical leave of absence until the end of June. I have asked Tim Cook to be responsible for Apple’’s day to day operations, and I know he and the rest of the executive management team will do a great job. As CEO, I plan to remain involved in major strategic decisions while I am out. Our board of directors fully supports this plan.”

I’ll provide additional commentary on this news in my wrap up tonight.

The financial media is having a field day with a letter issued by Apple (AAPL) CEO Steve Jobs:

Excerpts…

STEVE JOBS ADDRESSING HIS HEALTH ISSUES; DISCLOSES A HORMONE IMBALANCES THAT CAUSED HIS WEIGHT LOSS; SAYS UNDERGOING TREATMENT, WILL CONTINUE IN CEO ROLE DURING RECOVERY
- Jobs: “The remedy for this nutritional problem is relatively simple and straightforward, and I’ve already begun treatment. But, just like I didn’t lose this much weight and body mass in a week or a month, my doctors expect it will take me until late this Spring to regain it. I will continue as Apple’s CEO during my recovery. ”
- “doctors think they have found the cause — a hormone imbalance that has been “robbing” me of the proteins my body needs to be healthy. Sophisticated blood tests have confirmed this diagnosis. ”
- Board says Jobs has its “complete and unwavering support.”

I can’t remember such a time when the health of one CEO was such a topic of discussion and speculation.

—–

Auto sales figures for December will be released today:

Consensus estimates:
Ford (F): -41%e (usually released at Noon ET).
General Motors (GM):  -33%e (usually released around 1:45pmET).

Dec 2008 had 26 selling days, the same number as in 2007, so there will be no adjustments on the sales figures.

Normally I would not report such news. But, because Apple (AAPL) has grown a large cult following of believers that the stock would never go down (in 2006 predictions were for Apple stock to go to $400). Unfortunately, like many bubble believers, their dreams of a $400 stock never came (what is even worse is there are still people who bought near the top at $200 and are still holding on for the day when it goes to $400… hope your not holding your breath).

Like many stocks that were vastly over priced, Apple had led the pack of those stocks that had a share price way out of proportion with reality. In early 2008 I wrote that Apple’s true trading range; based on real world economics should be between $40 – $60. Back then when I wrote that comment I received hate mail from some of the “Apple Cult” folks telling me that I would be proven wrong and that I should be buying Apple “before the price skyrockets”. Of course I never bought Apple… I shorted it!

(read more…)

Today’s market activity was essentially a "play day" of retail money. What I mean by this is that we did not see much evidence of any significant block trades or other high dollar value trades going through the tape. The commodity stocks brought retail money out of the woodwork as a way to get in on something that is going up. We can’t argue the fact that commodity prices are going up, it is what is partly responsible for our run away inflation now. But even with commodity prices rising there is still caution that is required. For a lot of the commodity stocks we have been watching we are seeing mostly retail money (by analyzing share lot sizes on the tape). Now of course there is some larger money in there as well taking positions but experience has shown us over the years that the larger trades are hedge funds and other large money players who are playing on the exuberance of the sector to only cash out once the ride is over then leaving the retail trader left with the bag.

For the most part those with the big money have already taken their position on the stock market playing field. They are either in cash, short the market, long the market, or (most likely) a combination of all three. Volume has been drying up somewhat lately from our analysis. This tells us that we are in a ‘quiet before the storm’. Time will tell, it all comes down to economic data now, FOMC actions, and major corporate events.

Today we actually did have some ominous events but for the most part the smart money is already expecting these events and are just riding out their positions. It is the surprise bad news that will bring volume levels back up and start the selling in force again. This morning we got the ISM Purchasing Managers Index data for February and it has contracted into the negative growth column. A reading below 50 is considered recessionary. The top line number was 48.3, employment showed a larger decline,  and new orders is also maintaining a down ward path.

The chart below is a 10 year chart of the ISM index. Observe the trend has been declining since 2003.

(ISM | Data Source Moody’s Economy.com)

Also of note today was the construction spending data issued by the U.S. Census Bureau. This is more alarming in that the trend reveals to us a very deep retraction in construction. This will come as no surprise to our long time readers as we have been discussing this index for many months. But with each passing month the trend reveals that conditions are indeed getting worse. The first chart below is construction spending as measured in US Dollars. The 15 year chart shows the recession in 2000 / 2001 with a leveling off of construction spending. And then in 2002 the spending started to increase again. But our current situation reveals an even more alarming pattern in that spending in contracting in a fashion not witnessed before.

(Construction Spending $US | Data source Moody’s Economy.com)

The next chart is also that of the construction spending data but presented in terms of year over year % change. This chart makes it even more clear just how much construction has contracted over the past 2 years.

(Construction Spending Y/Y% delta | Data source Moody’s Economy.com)

In the raw data we are able to see that non residential construction (commercial construction) is starting to show weakness. Commercial real estate and construction will be the next victim of the economy and credit implosion.

Last night I showed you a chart of the S&P 500 with our technical analysis applied. We pointed out the failure of the triangle pattern on the daily chart and some resistance directly below. Today the market traded in a narrow range just at the support line. We don’t see this support level being able to hold once selling volume resumes and is why we are still maintaining our short position on the market. An updated chart is shown below.

(S&P 500 Daily chart)

One the the weakest sectors today was technology. The Nasdaq was the weakest of the three major indices with such names as Apple (AAPL) and Research in Motion (RIMM) adding to the declines in the Nasdaq. Any stock with an elevated P/E ratio is being chopped down to size. Always remember that in a healthy bull market stocks can survive with elevated P/E ratios, but in times of economic trouble high P/E’s are a death sentence for a stock. This is why we were warning last year about our readers taking their profits out of Apple because we saw what was coming. History repeats itself over and over again when it comes to stocks that are bought up on hype, speculation, and hope. Apple (AAPL) was no different, it was a stock that ‘everybody’ had to own as everyone in the media hyped it as the best thing since the invention of bread. Stocks like that are great for a short ride, but not a long term investment. You have to know when to take your profit and move on for once a high P/E stock has been chopped down it usually never obtains those levels again. All one has to do for evidence of this is go back to the tech bubble of 1999 and 2000 to see that. There are still many stocks on the Nasdaq with high multiples and this adds to our concern of the Nasdaq bringing the markets down much further.

The next section of tonight’s commentary deals with one stock. Converted Organics (COIN). One of our readers had asked for a chart analysis of this company and I decided to go a bit further and go into some of the fundamentals of this company as well. Converted Organics is a company that is still in it’s development stage. They have yet to show a profit and they are currently in a negative EPS situation. This company has caught some attention recently as there is some speculation that Dennis Gartman (a highly respected market analyst) has indicated that Converted Organics showed some promise (we have not seen proof of this claim). Aside from the speculation that Dennis Gartman either owns shares in this company, or merely mentioned it as a possible bright spot in the field of agriculture if it is true is not enough to justify the current price. What has driven up the price so much is that this company has been picked up by some stock picking web sites that specialize in ‘pumping’ stocks. There is an enormous amount of stock pumping taken place with this company at this time. And the share structure for COIN is such that it is a stock that can be easily manipulated.

(COIN – Share Structure)

Observe that COIN only has a share float of 4.2 million shares. This is a dangerously small amount, and the short interest is also rising. We can’t speculate on the claims of Dennis Gartman’s involvement (or non involvement) for we can not locate any proof to support either case. But regardless of that, one needs to exercise extreme caution on this stock and should be taking profits to be on the safe side. A stock with this small of a float can quickly lose 50% of its value in one day of trading. Also of note is that Converted Organics is late in filing their current quarter earnings which should have been released a few weeks ago. Not uncommon for small development stage companies to be late with earnings reports but it should always raise an eyebrow when they are not on time. We are not recommending this company for a buy or sell, we are simply pointing out the facts as they stand currently. We have no position in this company, long or short.

The chart below shows Converted Organics’s (COIN) earnings history

(COIN – Earnings history)

Weakness in the market continues to be the theme. Last night’s Cisco (CSCO) numbers and weak guidance has the Nasdaq selling down significantly in pre market. Other companies that share the sector, and even some distant cousins of the sector are also being hit with people selling out. Apple extends their losses further this morning before the open and is now trading around $119. Hard to tell at this point if any bounce today in tech stocks will hold or not, but I have to say that trying to guess a bottom is nothing but asking for trouble. I am NOT a buyer of any tech related companies here.

The chart below is a weekly chart of the Nasdaq. Notice that we are very close to a significant trend support area. I expect to see some buyers of the Q’s (QQQQ) if the Nasdaq reaches the trend line. The question is if it will hold or not. If the Nasdaq were to close below the trend line I identified on the chart it will have significant bearish implications for the Nasdaq for it will have fallen out of a trend that was in place for 3 years.

(clicking on the chart will take you to a dynamic chart with 20 minute delayed data)

Retail sales have been pouring in this morning and the overall consensus has been weak sales growth. Wal-Mart (WMT) being the biggest this morning with lower sales (again). Some bright spots in the retail sales but the overall picture is weak. Macy’s (M) is laying off 2,300 employees.

The Bank of England lowered their interest rates by 25 basis points and the European Central Bank left theirs unchanged.

Initial jobless claims came in as well this morning and the continuing claims (the more important number) continues upward which presents us with further evidence of a deteriorating job market.

Over the past week we have received requests for some individual stock analysis. In tonight’s post I will address these individual stocks/ETF’ questions.

The first stock is that of Mattel, Inc. (MAT). And this analysis is based on a long term investment. As we all know the toy industry has had a rough patch of time with the Chinese toy recalls over the past year, Mattel has not escaped this problem and it is reflected in their stock price as Mattel has lost approximately 35% of it stock value from the recent high in April 2007. The chart analysis is a very interesting one, there are multiple scenarios at play and I will discuss each one.

• The monthly chart for Mattel shows a nice symmetrical triangle pattern in development since 2000. Symmetrical patterns can resolve to either side over time, it is essentially a 50/50 chance of a failure of the pattern and a drop below, and a roughly equal chance of an upside resolution. Examine the chart shown below, notice the triangle pattern as shown with the black lines drawn below and above price patterns. Also notice the blue box drawn in the center of this triangle, this is a strong support zone. At this time Mattel is trading right at that price support zone. To use this current support as an entry for a long term investment has the risk of failing this support zone and falling to the lower triangle support. So buying at this price is technically a sound idea with the caveat that it could still go lower to the lower support line. And because this is a symmetrical triangle one has to keep in mind that it could fail the lower line, and if that happens then Mattel will be on a new downward path for a long time. Entering at this current price level offers a good price entry with higher risks involved.
• The second investing scenario would be to wait and see if Mattel does pull back further to the lower support line, and then if it consolidates at that price region then that would be a lower risk entry. Why lower risk? Because the lower triangle support line provides an excellent stop loss point to use as exit criteria, for if the price fails the lower line then it will be a significant trend change for the worse and you would want to exit the trade. It also offers the best reward potential as the entry would be on the lower support price level.
• The third and last scenario for considering Mattel as a long term investment would be to wait for an upside resolution to this triangle pattern. If the price breaks above the pattern that has been developing over the past almost 8 years, that would signal a new shift in investor psychology on Mattel and would be the start of a new up side pattern development. The risk of entering this stock on the upside break out of the triangle pattern is lower but the reward is also lowered due to the higher price entry.

Now when you add in the current economic conditions, we would tend to think that there is a higher chance of this stock failing the support price range it is currently trading at. Any more news of toy recalls, decreased sales (especially this Christmas), or more general economic data showing a slowing economy would impact Mattel. So there is the potential for Mattel to fail the current support zone and head down to the lower triangle price support. If it were not for the current economic conditions, I would use this current support pattern to scale into Mattel, but the economy and the declining retail sector concerns me. My risk tolerance would have me wait for a pullback to the lower triangle line or the break above the upper triangle line for a long term investment entry.

The next stock is CountryWide Financial (CFC). Someone asked if this would be an opportunity to get in cheaply. Lisa and I discussed this and we both share the same view, and that is the risk is too high. The sell off in CountryWide stock is not due to normal seasonal conditions, or a slight miss on earnings, or a slightly soft housing market. The sell off has been unprecedented in terms of volume and intensity. We feel Countrywide (CFC) offers day trading opportunities only at this time, over the longer term there is still a high risk of CFC shares going lower still. There is still speculation by well respected analysts that CFC could end up out of business in the future. So with CFC we say "no" to a long term investment, the reward potential is high, but the risk is even higher.

Next question was on ETF’s (IAK) and (PEY). IAK is a fund that seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the Dow Jones U.S. Insurance Index. The Index measures the performance of the insurance sector of the U.S. equity market. This fund became active in early 2003 so there is not much in the way of long term price history to draw any conclusions from. However, based on the insurance sector stocks themselves, there has been a general down trend since the middle of last year. We don’t recommend this ETF for a long term investment.

PEY is a fund that seeks investment results that correspond to the price and yield of a index called the Dividend Achievers(TM) 50 Index. The Fund seeks to achieve this by investing at least 90% of its total assets in stocks selected on the basis of dividend yield and consistent growth in dividends. While we like the investment strategy that the fund manager has chosen, we are again left with little price history from which to work with, this fund became active in late 2004. With the little price history there is, the current pattern looks bad. In general, Lisa and I do not favor ETF’s as long term investments due to the fees involved. We do like them for short term trades to capture some large moves in a relativity short period of time, for example, our play on the GOLD price tracking ETF (GLD). That play yielded us a 20% profit in 3 months.

In summary, we would prefer selecting individual stocks from each of the sectors that the ETF’s track for long term investments, and not an ETF itself. For the insurance industry, we don’t like this sector for the short or long term as this point. As for stocks with consistent growth, many of which reside on the S&P 500, we want to wait until the current economic conditions and credit crisis is behind us before getting to heavily invested in companies for a long term investment. Many prices ‘look’ cheap right now, but they could easily become even cheaper later.

Another question is on Apple (AAPL) and our thoughts on earnings in January 2008. It is our current believe that Apple is over valued and the price momentum has been largely a result of the large popularity of this company. The expectations of the iPhone and their iMac sales are hugely over rated when compared to the PC sales from such names as Dell and HP who have a much higher market share. When a stock becomes a ‘momentum’ stock, it is bid up much higher than reality would normally dictate. Apple has a P/E of 42.25 (at the current price level), where the industry that Apple trades in has a P/E ratio average of 34.94. This would put Apple higher than it’s peers, of course some of the higher price is based on a very well run company, which Apple is. But the price of the stock does not always track the performance of the company financial’s, instead they follow the hype and growth expectations (even if they are over inflated). When the Nasdaq took the hit over the past two weeks Apple has pulled back and so far is hesitant about being bid up anymore. The projections of a subdued retail sales season would have a substantial impact on Apple if their reported sales takes even a minor hit. The expectations of Apple’s performance are being held too high. And if the projections of a bad Christmas shopping season materialize it would be reflected in their next earnings period and the stock would most likely suffer severely. We would be inclined to wait out any retail stock (even though Apple is a technology industry company, their sales are mostly retail dependent) as the economy and falling retail sector stocks are not showing a reversal yet.

The next question is a broader question, it pertains to the price of oil. Some would say that oil has reached a top while others say there is still more room to move up. When gauging commodities prices, some analysts use inflation adjusted data for determining the current value of a commodity. While that analysis methodology is useful from a point of reference (i.e. historical value), it serves no purpose on the actual technical analysis of the charts and the potential of upward or downward potential. We view oil in a healthy up trend that has been in force close to 9 years. The only way we would claim oil was going to be in trouble (speaking of the trend) is if we saw a trend break. Currently, crude oil has a strong support zone in the $75 to $85 range. If oil remains above that price support, then the up trend of oil remains in tact. The fact that we have pulled back slightly from the near $100 price level is of little significance to us. Oil remains on an upward price trend, and only a break below $75 would we see the potential for a shift in that trend.

Another question is concerning buying ‘puts’  (options trading) on some sectors by buying options in ETF’s. First, not all ETF’s are able to be "optioned", and those that are it is our opinion that trying to capitalize on the current volatility in the financial and retail sectors, and their impact on the overall markets is too risky. The chances of gap ups and gap downs within these sectors could be too costly for an options holder. Lisa and I are not day to day options traders, we prefer the stocks over the options, less risk. We will use options in complex trade scenarios where we want to balance our risks on long term investments. But we need to say that absolutely no one should play with options at all unless they have already obtained a steady profit from swing trading over time. If you are struggling with your stock trades, do NOT think that options will be your savior. On the contrary, options more often wipe out the equity of traders who are not already taking profits out of stocks. Stick with the stocks, taste great, less risk. And 4 out of 5 dentists recommend stocks over options.    Ok, a little humor.

Another question is on Garmin (GRMN). The market would not have liked it if Garmin acquired Tel Atlas because the price was too high. The view is the acquisition would have diluted GRMN earnings too much for years to come. The stock price of GRMN gapped up on some upgrades on Friday morning and due to the upgrades the shorts in the stock had to cover. This sent the price up substantially on Friday in pre market, but the upward price gap provided additional opportunities for more people to sell out. In the first 1/2 hour of trading GRMN sold off on high volume. This shows that there were more people wanting to get out then wanting to get in. the chart shown below is an intra day chart of GRMN from Friday (November 16th). Notice the intense selling out in the first 1/2 hour and then throughout the remainder of the day the money flow continued to weaken. This chart patterns reveals the real dynamics of the stock where the gap up was a short covering rally and once the market was open the smart money was cashing out. If there was a genuine belief that GRMN would go higher then we would not have witnessed so much selling immediately after the market opened. Garmin, like many stocks trading on the NasDaq or otherwise considered a "tech" stock are off limits for now. Too much uncertainty surrounding the roll over we saw in many of the momentum stocks. Garmin has been one of those highly speculative momentum stocks. If you are considering Garmin as a long term investment we would prefer waiting for the price to drop to trend support ($70.00). That would provide a lower risk entry for a long term play on Garmin. Grabbing share at this time is too high of a risk to reward ratio.

Another question was on SalesForce (CRM). Last week CRM issued quarterly earnings, they beat the current quarter estimated revenues and issued an "in line" forward guidance for FY2008, for FY2009 they lowered their revenue expectations. Heading into the earnings announcement CRM had a large short interest as the expectations among the street was for a worse than expected quarter. With the beat on current revenues expectations and an "in line" FY ‘08 the shorts had to cover (the majority of shorts on any stock are short term trades) and propelled the share price up almost 13% on Friday. But it stopped right at resistance. We would expect to see CRM trade lower in the coming days, a good entry on CRM would be on the ‘break’ above resistance. CRM is a difficult trade with the lower FY2009 revenue expectations that the company announced. Lowering forward guidance a year or two ahead shows that the company has reached "saturation" within it business space. I would be willing to say that CRM will trade sideways or down over the coming months.

Well, that wraps up the questions we have received over the past few days. We hope we have not missed any. What I decided to do is set up a new email address that both Lisa and I will be able to access. And the email address will be for asking questions on stocks, sectors, etc.. That new email address is: questions@rebeltraders.net

Once the full RebelTraders web site is operational there will be a message forum where anyone will be able to post questions and even discuss among yourselves your trading ideas and get to know the other readers and subscribers of our service!