Apple Drops a Turd in the Punch Bowl

Our very short-able target in Apple has been $461 or lower. Last week, however, with the stock in the throes of a steep rally, we moved to the sidelines. As we explained in a headline at the time, We’ll Sit Out the Short Squeeze. And so we did, as Apple rallied from a 30-percent-correction low of $483 last Tuesday to a high yesterday afternoon of $528. That peak proved fleeting, however, to put it mildly, since one could have bought the stock just 90 minutes later for as little as $457.

What could account for such violence? For starters, there was the usual confluence of village idiots (aka “Wall Street”), headless chickens and panicky shorts waiting for the big announcement from Cupertino. All it took to send these nervous players colliding like particles in an atom smasher was some disappointing earnings news. This Apple duly supplied after the close with a report that profits for the most recent quarter had remained flat for the first time in years.

So why did AAPL shares initially feint higher on such rotten news? Answer: The aforementioned village idiots, headless chickens and panicky shorts were evidently drawn offsides when the ball was snapped. Remember, these are guys who have come to depend on “thinking” machines reacting at the speed of light to get an infinitesimal edge over the competition. Under the circumstances, it’s not surprising that some of those machines would have jumped the gun the instant the letters “Ap…” appeared on the tape.

S&Ps Topping?

So what now? Although the stock signaled even lower prices (i.e., 447.55, a “Hidden Pivot” support) when it exceeded our target at $461, we don’t pretend to know how this is going to affect the stock market in the days ahead. Even so, it’s worth noting that the S&P futures had been struggling for two days to push above a longstanding rally target of ours at 1494.50. The best they could muster — on Tuesday, in after-hours trading — was 1491.50.

Will that prove to have been a major top? Quite possibly. If not, though, there is another rally target above it with the potential to stop a nearly four-year buying rampage that has feasted on bear stew since early in 2009. And above it there is yet one more Hidden Pivot target – for the Dow Industrials – that we’ll hold in reserve against a possible Mother of All Bear Traps. Want to see how high this die-hard permabear thinks the Indoos can go? Click here for the free trial subscription to Rick’s Picks that will give you access to the answer. Then come over to the chat room, where you can ask actual subscribers how consistently we’ve been on-the-money.