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August 21, 2012 / redman59

Time to Short the $AAPL Monster?

Earlier today there was a lot of optimism in AAPL as it gapped on the open beating those that shorted it yesterday because it was “overbought”.  Those that did short and held on were rewarded as AAPL continued to sell off and remained in a downtrend all day.  Now the question is “is it time to short the beast”.  One thing I liked was that AAPL printed a Dark Cloud Cover candlestick pattern.  One reason why I like to implement candlesticks is that because they interpret price action and sentiment alone and not overbought/oversold, divergence, etc.  One thing I found interesting about AAPL and this pattern is that it has printed 4 times in the last 5 months and the time before that goes all the way back to 01/09/2009, so a big gap in time.  The chart below shows the recent occurrences that AAPL printed the Dark Cloud Cover (DCC) pattern.

Here are the highlights in those prior 3 occurrences:

  • When AAPL opened above the low of the DCC day it resulted in subsequent down days (1st & 2nd occurrence)
  • When AAPL gapped below the low of the DCC it resulted in an up day and rally taking out the DCC day high in subsequent days
  • In the first 2 occurrences when AAPL traded down, the DCC day was on above average volume
  • In the 3rd occurrence when AAPL traded up, the DCC day was on below average volume

When looking at DCC days and any day where you want to statistically analyze candelstick patterns or chart patterns I suggest going to the website of Thomas Bulkowski at  I went to look up statistical data for days of Dark Cloud Cover candlestick patterns and notes from his research are below:

  • Has poor reversal performance with just 60% of the time price changing direction from up to down
  • Once the turn is made and price breaks out (taking out DCC day highs), price trends ranking 22nd out of 103 candle patterns
  • Frequency rank is 46 out of 103 candlestick patterns
  • Once it does appear, it ranks 22nd for performance and that means price has a tendency to trend after the breakout (take out of DCC day highs)
  • Reversals occur most often within a third of the yearly low (which is far from AAPL’s performance as it hit new highs)
  • Best 10-day performance rank: 19 of 103 candlestick patterns (bull market, up breakout)

So what is my takeaway from this?

  • Price has a 60% chance of reversal of the current direction, which is up for AAPL
  • Of the times that price does change direction, the best odds are when the stock is in a downtrend, so this pattern is against the odds as AAPL is in an uptrend.
  • If the DCC day high is taken out (674.88), price has a tendency to continue in the direction of the trend (which is up) and ranks high among candlestick patterns (19 of 105)

My personal thoughts.  I like these reversal candlestick patterns more to the long side than the short side.  Many traders watch the high of these reversal candlestick patterns and use them as stops when taking the short side.  So when these highs are taken out it creates a covering type scenario as those that were short are then decided to be on the wrong side and they then cover the position causing a further move in the direction of the trend (ie. 3rd DCC day on chart).  If the low (650.33) is taken out tomorrow the trader could put on a short position expecting continued downside as seen in the 1st and 2nd DCC occurrences on the chart.  If the high is taken out then the trader could put on a long position looking for that covering scenario.

I personally only trade AAPL with options as I find them to be the ultimate way to control risk and not have to watch the chart so much.  For example, currently the Weekly 655 put is trading at 6.275 mid price.  If I am willing to risk $300/per contract on the trade (nearly 50% loss on the option, fairly conservative IMO) then I could put the trade on and not sit at the screen and watch AAPL by the penny which can be mentally draining.  AAPL is an HFT delight and I have found using risk control through options and mental stops the best way to trade it, but that is my opinion.

Disclosure: Long 650/660 Weekly Call Vertical


Leave a Comment
  1. Carlo / Aug 21 2012 10:51 pm

    Another great read thanks for sharing. How do the profits work on a Weekly Call Vertical? You want the prices over 660 for max profits?

    • redman59 / Aug 21 2012 11:03 pm

      Right Carlo I want the the price to be over 660 for max profits. My entry was 3.97 so if above 660 my max profit would be +$603 per contract. Also thanks for the comment and RT as well, appreciate it.

  2. Carlo / Aug 21 2012 11:41 pm

    Keep posting this great information and I will be back daily. Your definitely helping my education process.

    • redman59 / Aug 21 2012 11:54 pm

      Thanks Carlo and glad to help. I have no formal Wall St or college finance education. Been trading since mid-2007 and love the markets. I don’t get into financial statements but just trade off price action, statistics, and what I have learned through the years. I have subscribed to different services of different walks and try to implement all in to trading. My only goal is if one person can learn one thing from my past success or fails then its a win for me as I like to help when I can.

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