Purpose of analysis
This will be an ‘open analysis’.
By open analysis I mean that I do not have a strong opinion as to the next movement of the stock or of any possible trading strategies.
I do an open analysis when I can’t project a possible future target price for the stock. At least not with my ‘simple analysis’ methodology.
This is in contrast to stocks that I do have a bias for such as Ford (F) which I am trading short term, Bermaz Auto (Bauto) which I am investing in for income and plan to add to my position and OpenSys which I plan to pattern trade, trend ride and invest for dividends.
Of course this does not mean that Aaple cannot be traded. Just that there is no good trading setup using my usual technical tools.
A. Naked chart analysis
I like to start off with the naked chart, using Japanese Candlesticks.
These are the things I look for in the naked chart:
- General direction of the price movement
- Chart pattern
- Highs and lows
- Obvious support and resistance
A.1. General direction of the price movement
It can be quite clearly seen that the price of aapl is generally moving up. A similar picture can be seen on the daily and monthly charts.
A.2. Chart pattern
I really love looking for chart patterns and trading them. In fact, pattern trading is my main trading method. I love it for its simplicity, though in terms of efficacy and reliability, I guess this is open to debate. It is just a personal preference.
As drawn, aapl formed a symmetrical triangle after a period of uptrend.
Triangles are periods of consolidation after a trending move – either uptrend or downtrend. A symmetrical triangle may be a continuation pattern or a reversal pattern.
In the case of aapl, it broke above the upper resistance line to move higher, thus this symmetrical triangle – in hindsight – was a continuation pattern.
Could it have been a reversal pattern?
Yup, no problem. It can also be a reversal signal.
This being said, it should be pointed out that even patterns that are considered as being usually bullish continuation patterns like the ascending triangle may be harbingers of a reversal. The word in point is usually. Technical analysis does not deal with certainty. Only GOD knows with certainty what the market will do next. Technical analysis merely guides us on probabilities.
A.3 Highs and lows
Aaple stock has been forming higher-highs and higher-lows, which is also one way of defining an uptrend.
Although in the current strong uptrend aapl simply broke through every high like it was nothing, traders who are trading the position may view the previous high as a potential resistance and the previous low as a potential support, the breaching of which may signal a retracement or even a trend reversal.
Highs and lows are more useful in a not-so-strongly-trending market like this portion of aaple between 2014 and 2016. Yes there are periods of strong trends in this segment like the downtrend in Q4 2015 and the uptrend in Q2 to Q4 2016 – which would have been great trading opportunities for shorter term traders but longer term traders or multi-year investors who look at a larger picture and longer time frame may see these historical highs and lows as potential support around which to add their position and historical highs around which to potentially take some profit depending on their trading/investing strategy.
I sometimes trade support and resistance, entering into a long position near support and taking my profits as prices approach a previous high which could become a resistance.
B. Pattern analysis
Whenever there is an obvious pattern, I will opt to do a pattern analysis first and base my trade on the pattern rather than any other method either structural support and resistance trading or trend trading which are the other methods that I commonly use. This is just personal preference, and to each their own.
The weekly chart of aapl shows an obvious symmetrical triangle which has in fact already been broken and was thus – in hindsight – a bullish continuation pattern.
The potential Target Price (TP) for the breakout of this particular triangle is around $310. Aaple has already reached this TP.
A pattern trader who managed to see this pattern just prior to or slightly after the breakout could have analysed the pattern in this manner and traded the position if it was within their comfort zone. Aaple stock moved about $100 from the breakout of the triangle around $200 so anyone who had taken the position would have made a 50% return in this period.
Notice how simple it is to analyse a chart pattern. For a symmetrical triangle, the potential TP can be predicted by extrapolating the base of the triangle on the point of breakout (green arrows). Very straight forward and black-and-white, very easy to do and pretty obvious for everyone to see. this is the reason I love pattern analysis so much.
A self respecting trader/investor though would not base their trades on a single analysis alone though…
C. Trend line
In the naked chart analysis, it can already be seen that aapl is generally trending up which is quite obvious at this point, and is supported further by the formation of higher-highs and higher-lows.
Another way to analyse trend is by using the moving averages. I prefer to use the 50 period moving average (MA50) and the 200 period moving average (MA200). The reason being that these two moving averages are the most commonly used moving averages.
I believe that technical analysis is a self-fulfilling prophecy. Meaning that we – the traders and investors – as a collective mind looking at the same charts and news are the ones that make technical analysis true. Going by this logic, looking at what everyone else is also looking at should work better than doing something so complicated that hardly anyone else is likely to be looking at what you are seeing (on your chart). Of course, this is up for debate and there are traders making a living off of very complicated technical analyses and mathematical formulas.
One reason I like to draw the moving averages is because I wouldn’t want to be caught on the wrong side of a major moving average. Like in this example:
An ancient chart of aapl, but aapl nevertheless, same company that we are analysing.
If you were bearish on aapl at this time and trading this descending channel, then this would have been a potential entry point for a short position. Yes the candlesticks were going up strong but there is a trading wisdom that goes “whatever goes up fast, can come down faster”.
The fact that prices had bounced off the MA200 that was in fact even sloping upwards (a more bullish indication) may have caused traders to be more wary of the possibility that the short term downtrend at the time had come to an end.
The current chart shows that aapl is trading above its MA50 and MA200 and that the MA50 is trending above the MA200, and both MAs are sloping up. All of this indicates an uptrend.
The triangle pattern also formed within these uptrending moving averages, hence if a trader was trading the symmetrical triangle, the bullish MAs would have been a supporting point for a long position.
D. Directional movement index (DMI)
Ok I am going to go against my own advice here of using indicators that most people use in a way that most people use them. I believe that not many people use the DMI for trading in the first place and the way I use it is something that I made up myself. You won’t find it in the usual description of the DMI.
I have no excuses for this other than that it’s just something I found, that I understand better than other technical tools and that has worked well for me.
If there is a way to improve my usage of the DMI, I’d very much appreciate your insight.
I don’t use the DMI as a trading signal or to draw potential support and resistances. I use it to assess several aspects of trend, one of which is the risk of a retracement.
In this latest chart of aapl, the strength of the uptrend can be seen in the divergence between the +DI and the -DI with the +DI trending above and the -DI below. The ADX had also been moving upwards, another indication of the strong uptrend.
However, around the vertical blue line, the ADX which had been moving between the +DI and -DI, crossed above the +DI. When this happens, I will be wary of a potential retracement or even reversal.
This was actually the point of breakout from the symmetrical triangle. So should you take it? Or should you be afraid of a false breakout? Talk about analysis paralysis, and I only mainly use the MAs and DMI.
For me, I would have taken a small position or used a higher probability trading method such as using spreads as opposed to single leg call options.
Where will prices go next?
Based on black-and-white technical analysis – no idea, yet.
As of market close on 9th of January 2020, aapl is at an all time high of $310.33. This was the target price (TP) based on an analysis of the symmetrical triangle. There is no pattern to analyse at this point in time, so other methods will need to be used.
The moving averages show that aapl has diverged very far from its MA50 and MA200. Prices will always have a tendency to return to its moving averages. Add the fact that it has reached a potential TP and the trend has been going for so long and so strong, there is a possibility that the stock will take a short breather.
When will this happen? Only the future can tell. It is not at all impossible that the price will continue to shoot up. The only thing is, there is no way of determining a TP and the support – should prices fall – is quite a long way down. For me entry at this point is very risky.
Should prices fall, where are the potential supports? Any of the previous highs and lows can serve as supports albeit weak. The MA50 and MA200 are stronger supports and prices may go there.
It may also just go down a bit, not all the way to the MAs, consolidate and start forming a pattern.
So when should you enter? I would wait for the picture to become clearer before entering with a proper strategy.
How far can it go in the future? I’ll wait a while for more information to make this projection.