Outside the Box: ‘Key reversal’ in Apple’s stock prompted a market rebound, but investors ought to be suspicious
The U.S. stock market, as represented by the Dow Jones Industrial Average, was down 500 points Monday. Then it flipped positive.
Serious investors ought to know and understand the reason behind the rebound. Let’s explore the issue with the help of three charts.
Please click here for an annotated day chart of Apple AAPL, -0.57% stock.
Please click here for Apple’s intraday chart.
Please click here for an annotated chart of the Nasdaq 100 ETF QQQ, +0.33% Similar conclusions can be drawn from the charts of the Dow Jones Industrial Average DJIA, -0.22% S&P 500 ETF SPY, +0.02% and small-cap ETF IWM, -0.10%
Please note the following:
• Apple carries a very heavy weighting in indices and, therefore, disproportionately affects the markets.
• Apple’s stock was down on the news that a Chinese court had granted an injunction against Apple selling its products in China in favor of Qualcomm QCOM, +0.19%
• Apple uses Qualcomm technology. There is a dispute between the two companies, and Apple has been withholding royalties.
• Apple claims that injunction is against products using iOS 11. The current operating system is iOS 12.
• Apple continues to sell its products in China.
• Qualcomm seems to claim that the relevant features are in iOS 12, and selling Apple products is a violation of the injunction, but there is no clarity.
• Apple’s stock was down on the news. As Apple’s stock started bouncing off the lows, as shown on the intraday chart, there was a discussion on TV about a doji forming. A doji is a technical pattern in which the open and close are virtually equal.
• The momo (momentum) crowd money flows temporarily turned extremely positive from negative just prior to the doji mentioned on TV.
• To learn about money flows, please see “Here’s the most recent update on money flows in Nvidia, Apple and Amazon.” Money flows give you an edge.
• As positive commentary on the technicals of Apple’s stock continued on the TV, the stock took off.
• Along with Apple’s stock, the Nasdaq 100 ETF took off because Apple has a heavy weighting in that ETF.
• As the Nasdaq 100 ETF rallied, popular tech stock stocks such as Amazon AMZN, +0.13% Facebook FB, +0.16% Netflix NFLX, -1.62% and AMD AMD, -0.05% started moving higher.
• The end result is that Apple’s stock and the stock market staged a “key reversal,” which is a positive technical pattern.
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Investors ought to be somewhat suspect because the rally was not triggered by natural buying that often comes in at lows or by a fundamental or a macro event, but by the mention of a doji on TV and the resulting momentum. Technical analysis is only one of the six screens of the ZYX Change Method that I use. Investors should not make decisions only on technicals, with the exception of very short-term trades.
Disclosure: Subscribers to The Arora Report may have positions in the securities mentioned in this article or may take positions at any time. Nigam Arora is an investor, engineer and nuclear physicist by background who has founded two Inc. 500 fastest-growing companies. He is the founder of The Arora Report, which publishes four newsletters. Nigam can be reached at Nigam@TheAroraReport.com.