If you look at this first chart of AAPL (Apple, Inc.) you will see roughly a double top from yesterday’s high, and the first 30 min high today.  Then you see a double top today between the second candle and the fifth candle.  AAPL then drops and bounces along the ORL for a while, and two more smaller double tops.  AAPL is showing late day weakness along with the overall market, and look like it might roll over.  However, there is not a clear signal candle at this, the 15-min chart, so let’s drop down to the 1-min chart.

On this chart, you can see two more micro tops, as AAPL tries weakly to climb up and rising trend line off the LOD.  This mini double top give I a great entry spot.  I am looking for AAPL to break this upward trend line, and I want to short the break, and place a stop buy just above the high of the second mini top.  This give us a $0.35 “R” risk.  Our target is the next serious level of support which is $201.83, yesterday’s low which you can see on the first chart.  This gives us roughly a 1 to 4.5 risk/reward factor.

I shorted the break of the trend line.  Price pulled back up and “kissed” the bottom of it, which is normal price action, and then began to fall.  This short was above the ORL and the LOD, which means you have to watch those levels in case price can’t break through.  There was no resistance at the ORL which it went right through, and although there was minor consolidation at the LOD, it was pretty much a smooth trip down to the target when my buy order was waiting.

RIMM (Research In Motion, Ltd) continued it’s run today.  I got a late start, but when I switched on my screen, the chart below was staring at me.

These are the trading set-ups you live for.  The first bar is a large green candle on huge volume, and then you have a series of bars that consolidate on declining volume.  Look at the volume pattern at the bottom of the chart, that is EXACTLY how you want it to look on a consolidation from a large green stick.  The consolidation pattern is not a bull flag, but more like a pennant (though not exactly).  But it has a number of positives going for it.  First is the volume dry up, but next you have two progressive inside bars on five and six, and six is a NR7 (narrow range seven) bar.  This is a recipe for an entry.  I placed a buy stop $0.02 above the high of the sixth bar at  $60.34, and a stop-loss $0.02 below the bar at $60.08, for an “R” factor of $0.26.  This trade does have an added risk in that you are going long below the ORL, so have to watch that level for a potential reversal.

In order to set a target, I used a Fib extension.  This is calculated by taking the low of the previous day to the high of the OR, and then extending it to the Fib level of 38%.  That give a target of $62.33 or a potential 8R profit.

My buy order was filled on the next bar and price began to move up, with the 5MA providing support.  On an extended move up like this with no obvious resistance points near,  unless the candle is breaking an established support level, you want to wait until the candle has completely formed to see if the 5MA holds, which it continued to do as price moved up.  When price came in on the 23rd bar, as the day was getting late, and it looked like the Fib target was out of reach, I closed the position for about a 6R gain.

We have talked in the past about the importance of using an “R” value for both your risk and your reward. If you select trades with a favorable “R” ratio (minimum 1 to 3 risk/reward), you can be wrong over 70% of the time, and still break even. And if you are right more than 30% of the time, you will be consistently profitable on your trades. Let’s take an example of a trade in RIMM (Research In Motion, Ltd.) from Friday, to see how using “R’s” in trading plays out in the real world.

This first chart is of RIMM going into Friday, before the open. RIMM is a usual watchlist suspect, and from our overnight analysis, we have mapped out four S/R levels on a 15 minute chart. The chart shown is a 3-day chart and although previous days levels can be important, the most relevant is the preceding trading day’s levels. The S/R levels are the high of the day (A), The low of the day (D), and two interday pivot points (B and C). These are points we will use to look for entries both short or long, on breakout or reversal trades.

Our second chart shows the most important time of the day, the opening range. This range is key because it sets the upper and lower S/R levels after all the overnight buy and sell orders have been executed. For breakouts, we are looking to go long above the ORH (opening range high) and short below the ORL (opening range low). For reversal trades, we are looking to go short, below the ORH, and long above the ORL. The OR is set by the first 15 minute bar, as that is the time frame chart we are trading. The ORL exceeded the low of the previous day, so we have reset S/R level D, as this low is now more relevant than the previous day’s low. The ORH was just short of S/R level C, a previous day’s intra-day pivot point, and as the OR is more relevant, we have adjusted this level down just slightly.

Now we see that on the second bar, price tries to break above the ORH, but cannot hold, and is turned back. Bars three and four continue to pull back, all on declining volume. Bar four breaks below the ORL, but reverses sharply, on slightly high volume, and creates a green bullish hammer, that finishes above the ORL. This is our signal bar, and at this point we will determine our “R” ratio, to see if the trade is worth taking. This signal candle has a high of $57.23 and a low of $56.60, a spread of $0.63. The conservative, and technically correct “R” is to place a stop buy order $0.02 above the high of this candle, and a stop sell $0.02 below this candle. This gives us an “R” risk of $0.67. However, with a reasonable first target being the ORH at level C ($58.30), or a $1.05 reward, we are only looking at a 1/1.5 risk/rewarded ratio at best. This is not ideal, and we have three possible choices. Pass on this trade, take the trade, with perhaps a lower $ risk due to the lower reward target, or adjust our chart based risk amount. The last option is what I chose to do. With the ORL being a fairly solid S/R level, I choose to place a stop buy at $57.25, and a stop-loss $0.02 below the ORL of $58.00, with the added support of the round number coming into play as well. This gives me a risk of only $0.27, and a potential reward of $1.05, or almost 1 to 4.

My buy stop is hit on the next bar, and initially, the trade moves in my direction, and of course, I am the greatest trader the world has ever known. But then reality sets in, and price stalls, and move back down past my entry, and towards my stop-loss point.  Though price comes within $0.02 of my stop-loss, the ORL holds, and price bounces and continues to consolidate. Price finally starts to move up on bars nine and ten, with a slight increase in volume. However it is bar eleven, where the move starts to accelerate. This is a very large bar, and as it approached the first target level, a decision needs to be made. There are three choices. Close the entire position out for almost 4R profit, let the position run, or do what I chose to do, which was to sell half my position at the target price of $58.30, and let the rest run. The decision to let half run, had to do with the general strengthening of the overall market at this point, as well as the strong move for RIMM off the ORL. I put a stop loss $0.02 below the low of the eleventh bar, as this would be more than a 50% retracement of the move off the ORL, and a sure sign the trade was over. By putting the stop there, I am risking 1R of my profit (2R x 1/2 position), so worst case scenario, I have locked in a 3R profit for this trade.

Price indeed stops at the ORH, pulls back and consolidates in a sideways manner between bars twelve to twenty (the spike on bar fifteen is a data spike, price did not trade through it, and thus the stop did not get hit). Then on bar twenty-one, there begins a slight move up towards the ORH, all with small green narrow range (NR) bars and mini hammers. These bars all close above the 5MA which provided support, and I moved my stop up, trailing it below the bottom of each progressive candle, as resistance at the ORH was coming up, and more so because it was getting late in the trading day, and I wanted to lock my profit in on any reversal. Bar twenty-four finally broke and closed above the ORH, although volume was not impressive. At this point, the stop is moved up to just below the ORH. It is rare to be in a trade this late in the day, as the probabilities of a non-functioning trade suddenly going in your favor are slim, and there is not much time left for the trade to work out if it does. However, since we only have a half position open, and we have locked in our profit (4R at this point), there is no risk in keeping it open.

And fortunately, on bar twenty-five, we get a late day gift. Price moves up to $58.83, and closes at the high of the bar. Although the bar finishes a bit short of the price target at S/R level B, when you get a gift like this on the second to last bar of the day, you don’t get greedy and hold out for more, you close it, which is what I did at $58.80. Holding the second half of the position got us almost 1R more, for a total of 5R profit on the trade.  This is a trade the Wall Street Warrior would be pround of (I think).

It has come to my attention that a new tax on trading is being proposed….

 ”U.S. Congressman Peter DeFazio, introduced H.R. 1068: “Let Wall Street Pay for Wall Street’s Bailout Act of 2009”, which aims to impose a 0.25% transaction tax on the “sale and purchase of financial instruments such as stock, options, and futures.”

This tax is on the TRANSACTION AMOUNT, regardless of profit or loss. 

So let’s say you day traded AAPL.  You are in an out a few times during the day, with average size of 500 shares.  Three round trips, and 3000 total shares, for a transaction amount of roughly $270,000.  You would then pay $675.00 in tax, no matter if you MADE OR LOST MONEY.

Suffice to say this tax would basically kill active traders, kill liquidity in the market, and basically, kill the market.  It is hard to believe that any idea this crazy could get any traction, but why take the chance.

Please sign this online petition:

http://www.rallycongress.com/no2tradertax/1536/

Please contact your local senators and voice your disapproval:

http://www.senate.gov/general/contact_information/senators_cfm.cfm

Please contact your local Representatives and speak your mind:

http://www.house.gov/house/MemberWWW.shtml

A while back I did a post about the possible direction of AAPL, and I thought I would take a chance to update it.

As you can see from the chart below, AAPL is still in a large descending triangle, that has taken four months to create.

On a technical basis, we have some contradictory info.  The stock has made six progressively lower highs, which is bearish.

But it has dropped below the base twice and come back into the triangle, which can be bullish.

Price is sitting above the 50 MA, which is bullish (although it has done it twice before).

Prices is sitting below the 90 MA, which is bearish.

Some fundamental info is shown on the chart at these points.

• (1) Steve Jobs not to attend Mac World
• (2) Steve Jobs issues letter saying he has a “hormone” problem.
• (3) Steve Jobs issues letter saying he is taking a leave of absence.
• (4) AAPL issues record earnings (but weak guidance)

So what does this tell us?  Here is my take.  The chart is bearish, record earnings could not break them out of the triangle, and their CEO may be very sick.  Any other stock would already be down much more, but AAPL is unique.  It is a LOVED stock, and I mean LOVED.  People have an emotional attachment to this stock and do not trade it like other stocks.  It is also very widely held by institutions.  It think the key is the overall market.  If we break to new lows in the markets (as I think we will) I think AAPL will finally break down.  There has been a lot of false hope holding it up, and if it goes, it will go fast.  The measured target is $50.00, but is may take some time to eventually get to that price.  I know….$50.00!  Crazy isn’t it?  But $120 when it was $200 was crazy too.  And it breaking $120 after it went back up to $190 was crazy too.

But here is a trading tip, last time I wrote a post like this, AAPL popped up.  If it does this time and breaks the down-slope of the triangle with some volume, it will probably make it back up to $120.00.

APA gaped up, but immediately sold off.  It bounced in a congested area, and on the second trip down to that area it put in a hammer right on support, on the 1-min chart.  I entered on the break of the high of that candle.  I covered half at a minor high and the rest on a failed breakout of a consolidation range.  Good for 5R.

I was light on posts last week because most of my trades at the end of the week just went nowhere.  From reading some other blogs, they confirmed that it was a very choppy week, and thus my results were choppy at best.  One area I have to work on is to better recognize when the markets are not ripe to trade.  When they go sideways, I always seem to think I am “missing” set ups, and thus invariably “force” one (or two) that doesn’t work out.  What I have to do is trust myself more, and understand that if I am not seeing good set ups, then the market is probably moving sideways, and I should just take a pass for the day.

Hoping to see some better trending in the rest of this week.

Did not trade today, as I was too wrapped up in the inauguration day coverage.  First I have to say, no matter what party you belong to, it is a magnificent sight to see the peaceful transfer of of power in the greatest country in the world.  Secondly, I have to say that it really looks as if Obama and Bush like each other.  The exchanged laughs, handshakes, and back slaps that went beyond the traditional “graces” between ingoing and outgoing presidents (Truman and Eisenhower did not even talk to each other during Ike’s Inauguration).  Next I have to say that Keith Oberman is so low class, it is hard to believe.  He could not keep from sniping at President Bush all through the coverage.  He will never get past his bitterness about Bush, and it will always haunt him that Bush made it for two terms.  I am sure the former President thinks about Oberman about zero times a day.  Lastly, there was an interesting contrast.  President Bush was in front of 2 million people who really hated him, yet he looked cool and relaxed, and later in the day at his Waco barbecue looked downright happy.  Yet when they showed Clinton today, he really look bitter, even though most would say his presidency was a “success”.  Perhaps it is because Bush has his own values and integrity, and does not depend on the approval of the masses to make him feel good about himself.  He is very centered, and a happy person inside.  However, Bill was always looking for approval from others, and now the he has been marginalized, and more importantly, his presidency has been marginalized forever by the real first black President, he has no light to bask in.  My prediction is that the Bush presidency will be remembered much more kindly in the future, noting the world changing times it occurred in, and the Clinton presidency will be forgotten as one that occurred during smooth sailing, when no hard decisions had to be make, and the president just had to make sure not to “upset the apple cart.”

In the end, I wish the best for president Obama.  I have high hopes that he will govern from the middle, and not give in to the secular left wing his party.  He is starting off on a good foot.

I was not paying attention as much as I should have today because I “assumed” nothing would happen due to OEX tomorrow.  Because of that, I missed some good, profitable, and easy set ups.

AAPL make a green hammer type candle that closes above the 5 MA (after a long basing period), on the the 13th candle.  Enter on the break of that candle’s high.  Close at the ORH or higher.  By the way, AAPL made a nice comeback after the Steve Jobs news last night.  A move back above $85.00 with some volume might make it a trade for a move to $90.00-$92.00 area.

BAC gaps down, bounces, and bases for a while.  The 15th bar is an NR7 bar (although it is below the ORL).  Close position higher.

Tomorrow I REALLY don’t expect much action, but this time I will keep my eyes peeled and pay attention.

Not feeling well so not much analysis.  FWLT short, but realized I was right above the Fib after entry, so closed it at that point.  Scalps on AAPL.

For more on what might be happening starting tomorrow in AAPL, see my recent post here.