Speaking of addiction… I have to wonder, are consumers addicted to Apple products?

Or, more importantly, are investors addicted to Apple stock!?

I read recently that Apple’s share of the tablet market has shrunk, while Samsung has made gains. Increased competition spells trouble for Apple in the long run. But that’s not what I’m worried about right now.

My concern is that complacent investors have blindly placed faith in Apple’s stock in the hopes it would fix all the money woes they’ve ever had. This line of thinking – that one home run can fund years’ worth of easy retirement – is the same foolish thinking that Harry pointed to in the housing market’s bubble mania.

From a technical perspective, Apple stock has formed a “megaphone” pattern. This is characteristic of market tops, especially those that form after long-term exponential moves. Apple fits that bill nicely.

Here’s a look at AAPL’s megaphone pattern:

See larger image

While the megaphone pattern typically signals a bear market will follow, prices don’t collapse immediately. Instead, expect to see Apple’s stock bounce up and down within the upper ($700) and lower ($500) bounds of the megaphone for many weeks or months.

This is a consolidation pattern similar to the one I pointed out in gold recently. I came up with a simple strategy to take advantage of the mean-reverting nature of these consolidation ranges.

The rules are simple:

1) Buy AAPL shares each week that closes below $600, and
2) Sell Short AAPL shares each week that closes above $600, and
3) Stop trading if/when AAPL breaks outside the range (above $700 or below $500).

If Apple bounces above and below $600 for several months, this will be a very lucrative strategy. That said, mean-reverting strategies take a big hit once a trend develops, so be cautious.

I’ll keep an eye on this and let you know if we get a clear break outside the range. Apple is also setting up for a potential head-and-shoulders pattern. It’s too early to say, but if that develops it will be a very ominous sign. More on that another day…

If you haven’t done so already read the Survive & Prosper issue on “What Causes Long-Term Financial Crisis?”



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Adam O'Dell
Adam O'Dell has one purpose in mind: to find and bring to subscribers investment opportunities that return the maximum profit with the minimum risk. Adam has worked as a Prop Trader for a spot Forex firm. While there, he learned the fundamentals of trading in the world’s largest market. He excelled at trading the volatile currency markets by seeking out low-risk entry points for trades with high profit potential. An MBA graduate and Affiliate Member of the Market Technicians Association, Adam is a lifelong student of the markets. He is editor of our hugely successful trading service, Cycle 9 Alert.