I have owned APPL on multiple occasions over the past 6 years but I wish I could sit here and write to you that I was a holder the entire time (my gains are just a small slice of the longer term buy and hold pie) . I wasn’t a 1,200%+ gainer but I was in and out while taking profits on a yearly basis back in the mid to late 2000’s. Below is an example of yearly posts I made about Apple or as I called it “Green Apples” due to the fact that it was a cash register stock.

So, with all that praise and the massive gains, am I really turning bearish on the stock? Is Apple starting to turn sour? Well, not so fast but some minor red flags are starting to show up. Take a look at the charts below which highlight the lower highs and lower lows.

January 13, 2005: Green “APPLE”s

“Apple (AAPL) first showed up on my weekly screens on 10/24/04 at $47.41. Since this time, Apple has made the daily and weekly screens numerous times.”

January 17, 2006: All-Star Stock – Digesting Apple

“Apple has been on my screens for 15 months and has been in my portfolio on two separate occasions over those 15 months.”

January 10, 2007: Apple Inc. is Still Green

“What can I say; the apples keep getting greener!”

November 29, 2007: An iPod touch from Apple (AAPL)

“A new high and a move above $200 per share will be very bullish and a signal that this stock may have another run regardless of what the major indices do.”

Apple is still trading above the 200-d moving average and has not violated any long term trendlines so please do not short at this time. You may cash in shares and start to trim back your position by selling but I don’t advise going short just yet.

The ideal position to sell short is after a move below the 200-d ma when the stock tries to break back above but fails – that’s my sweet spot.

Goldman Sachs set a price target of $430 but I don’t listen to these “talking heads”. Another interesting fact: “Nasdaq OMX plans to announce a rare rebalancing of its Nasdaq-100 index, which will reduce the big weighting of Apple, which currently makes up more than 20% of the index.” – WSJ

As of today, April 11, 2011, I suggest cashing in some shares. A further drop and I suggest selling more shares. I wouldn’t even consider the word “short” until the stocks closes below the 200-d ma (trend trade of course – not day trading).

Let’s see if this decade long “Green Apple” turns into a “Sour Apple”.

The current market leaders will start to form climax tops after huge gains over the past 6, 12 or 18+ months.

So, how do we identify a climax top?

The following characteristics are typically found in a stock that is forming a climax top:

• A quick run-up or accelerating gains over a short period of time after a long term up-trend. The gains will be much larger during this short term run, proportionally, than the entire up-trend.
• A large gap-up after several months of a steady up-trend. Investor’s Business Daily (IBD) calls this an “exhaustion gap”.
• The largest daily and/or weekly volume of the entire up-trend.
• A large single day point gain, the largest of the entire up-trend.
• An intraday move to new highs on above average volume but a close that results in a loss.
• A stock that is trading 100% above it’s 200-day moving average. IBD states that a stock trading 70% above its 200-day moving average is showing exhaution.

Take a look at the $TZOO Travelzoo charts (daily and weekly).

As you can see, TZOO has confirmed the following red flags for a climax top formation:

• 10 of the past 13 days have been up days.
• A 68% gain over the past 13 trading days and a 100% move over the past month. Stock is up 900%+ since March of 2009.
• The largest daily and weekly volume of the entire run.
• A new high intraday with a close that resulted in a loss (today: a new high with a reversal to close down 3.69% on volume 485% larger than the average).
• The stock is trading more than 130% above its 200-day moving average.

With all that said – what should you do? I suggest that gains are locked in, at least a portion of your position 1/3 or 1/2 at a minimum.

In addition to locking in individual gains (in examples like TZOO), I highly suggest that you start to watch all market leaders and the general market indices for red flags.

As you can see:

• GOOG broke the up-trend after establishing a new 52-week high above $629 (point #1).
• From there, it consolidated and formed what is referred to as the minor sell-off (the lower horizontal red dotted line).
• Prices started to rise but failed to make another new high. This test of the previous high failed near point number 2 (March & April).
• A failure to make a new high is usually (not always) a signal that the trend is about to change. This is where some traders jump in early.
• Lastly, we reach point number 3 where prices drop below the previous short term minor sell-off (this is trend reversal and the signal to short). If missed, you can short on the first failure to recover the major moving averages (or #3 area which then turns to resistance).

This is the pattern I am watching setup in dozens of stocks across multiple industries. I am also watching this pattern to potentially setup in the major indices as well.

Remember, have patience and be prepared to sit on the sidelines for a while as this pattern takes time to build and then confirm (4 months for GOOG). The key word is CONFIRMATION!

You may play GOOG up and down short term but long term, the trend has changed!
Follow me on twitter to watch the stocks currently setting up this pattern (prior to confirmation).

As you can see:

• BLK broke the up-trend after establishing a new 52-week high above $242.
• From there, it consolidated and formed what is referred to as the minor sell-off.
• Prices stared to rise but failed to make another new high. This test of the previous high failed near point number 2.
• A failure to make a new high is usually (not always) a signal that the trend is about to change.
• Finally, we reach point number 3 where prices went below the previous short term minor sell-off (this is trend reversal and the signal to short). If missed, you can short on the first failure to recover the major moving averages (or #3 area).

In addition to the 1-2-3 setup, the stock has also allowed its 10-week moving average to cross below the 30-week moving average with typically signals a change in trend when both lines are starting to point down.

Victor Sperandeo says this about the 1-2-3 setup:

At the point where all three of these events have occurred graphically, there exists the equivalent of a Dow Theory confirmation of a trend change. Either of the first two conditions alone is evidence of a probable change in trend. Two out of three increases the probability of a change in trend. And three out of three defines a change in trend.

Take a look at the picture I scanned from Sperandeo’s book on page 76:

This is essentially the pattern I am watching for in several of the stocks starting to churn (run out of steam) that I posted to my twitter stream. However, have patience and be prepared to sit on the sidelines for a while as this pattern takes time to build and then confirm (nearly four months for BLK).

Twitter stream for 5/17/10 (stocks down on heavy volume, trading near 30-wk): $PCLN, $GMCR, $V, $MA, $TCK, $BUCY, $BTU, $MR

Recent Tweets on BLK:

• 7:33 PM Apr 6th via web: $BLK – 198.55, clearly falling apart (but gap down has to fill before ultimate slide).
• 10:02 PM May 5th via web: $BLK…Trading @ 174.80 & going down!

This is a game of odds with developed expectancies so take the trades and follow the rules.

The chart highlights in red where I was making the sell posts (the articles are listed below):

Anyway, I have been posting twits about the strengthening of the NH-NL ratio which is starting to tell me that the newest trend change is beginning. Yes, this is my first major blog post saying that my screens (market tools) are telling me to wake up because things are starting to change. It’s not time to jump in with both feet and buy every stock that’s up on above average volume but it’s time to sharpen the skills and be ready. We may look back and point to March and April of 2009 as the bottom of the market or at least the start of the changing trend.

We don’t have market leaders yet but when they appear, I will locate them, post up charts and talk about them nightly on twitter (twitter.com/cperruna). Too many stocks still have their 50-d moving averages below their longer term 200-d moving averages and new highs are still limited. However, new lows have dried up considerably and the NH-NL ratio has a moving average that is trending higher for about a month now. That’s the most sustainable trend for this ratio since the big decline started.

Stay tuned to the blog and my twits for follow-ups to my research on individual stocks and the overall trend.

In the meantime, take a look back at the numerous blog articles I posted in 2007and 2008 talking about a market decline, shorting stocks and selling in general. Learn from what the simple tools were telling us. I am far from a market genius and far from rich but I can make a few dollars following the leaders and the NH-NL ratio.

A Review of Articles Pointing to a Stock Market Decline in early 2008:

• May 23, 2008: Smelling Trouble
  

  The bottom line or point of today’s rant is the fact that I still feel that the market is headed for a decline or as I phrased it a couple weeks ago: The Big Decline (long term perspective of course).

• May 8, 2008: Market Distribution
  

  I originally started to point out market troubles back on March 14, 2008 in a post titled Snapshot Friday; I highlighted both the Dow Jones and NASDAQ with clear yellow shaded areas showing the 200-day moving averages pointing down for the first time since 2003 (that’s huge if you ask me).

• May 7, 2008: The Big Decline
  

  I am a positive person by nature and I prefer to buy stocks going up but I am starting to see several leading stocks struggle to hold new highs or fail to challenge recent highs. These patterns are familiar and they are suggesting that the recent bounce is the final stage before a possible market decline.

• January 23, 2008: Setups for Selling Stocks Short
  

  I wrote an article on October 15, 2007 titled How to Make Money Selling Short, precisely when the general market indexes were topping. I am not going to take full credit but subconsciously my charts were giving me signals that the market was showing the major red flags and signals of what we are seeing today.

A Review of Articles Talking about Selling, Profit Taking and Market Distribution in late 2007:

• 10/03/07: Is Shanghai a Nasdaq Déjà vu
  

  Well, the current two year rise of the Shanghai Stock Exchange Composite Index looks remarkably similar to the rise of the NASDAQ of the late 1990’s and the charts below explain better than I can!

• 10/04/07: A Technique for Profit Taking
  

  What do you do in a market like today when you have profits in multiple positions but you don’t want to give it all back? You want to continue to ride the winners but at the same time, you want to maintain the unrealized gains in your account. HOW?

• 10/12/07: Distribution Day
  

  This was the largest showing of volume in two months and is not healthy because it was pure distribution. It was only the second distribution day over the past month so we can’t call this a bear run but please be on the lookout for a possible correction of 5%-10%. Technology stocks led the decline as BIDU gave back 10% of its amazing run.

• 10/15/07: How to Make Money Selling Short
• 10/17/07: Inverse ETFs
  

  Have you ever wanted to short the market because you knew it was going down but your were too overwhelmed, nervous or even scared because you were unsure of how to do it. Well, Inverse ETFs may be your thing.

  These inverse ETF’s closed Wednesday with gains of 13.42%, 15.43%, 22.31% and 18.76% since I wrote about them.

• 10/18/07:The Real PTR Climax Run?
  

  I was early in September by trying to locate a climax run in PTR in this post:
  Petrochina (PTR) Climax Top? However, the HUGE volume on the latest push to new highs clearly indicates something is going on.

• 10/20/07: Second Major Distribution Day
  

  Technically speaking, we now have 4 distribution days for the NASDAQ and 3 for the DOW over the past month. It’s now time to start focusing big-time on the market leaders to see where they are going to take this market. If they start to roll over, you better be quick to take profits and even quicker to take losses.

• 11/01/07: CROX getting Swallowed
  

  I wrote a post titled Will CROX get Eaten? on September 20, 2007 and strongly noted the declining institutional support (see numbers below). Someone was jumping out of the stock and we now know why!

• 11/08/07: Market Corrections, Bears and the Big Picture
  

  Keep in mind that nearly 75% of all stocks follow the general market trend. Your cash doesn’t need to be committed to the market at all times. This philosophy is suited to making the most money in bull markets or markets trending higher.

• 12/11/07: When to Sell
  

  Why do so few books exist on the subject of “How to Sell”? Selling techniques are far more complicated than buying techniques and subject to considerably more emotional pressure, than those of buying.

• 1. Manage Risk: Learn to trade a manageable portion of you portfolio (I recommend to risk less than 2% of you overall portfolio equity on each trade). Always establish a risk/reward ratio before making a trade. Without the ratio, how do you know your risk?
• 2. Understand Position Sizing: All traders must learn to know “how much” to trade on each position. Do not overtrade or you will runt he risk of ruin. Position sizing is rule number one of managing risk.
• 3. Cut Losses: Do not allow losses to run wild. You must learn to cut losses and understand that losses are a part of the game, a large part of the game. Check you ego of winning at the door. We are here to make money, not go undefeated. Play sports if you want to keep score with a record rather than your bankroll.
• 4. Learn when to Sell: You must learn when to sell. Selling is more important than buying as it ties directly to risk management. Use stops if you haven’t yet developed the discipline to get out at your predetermined stop or profit goal.
• 5. Average up in Price: I will never hesitate to add shares in a stock that is moving higher (see Mastercard) but I always avoid averaging down. Remember, cut losses and never throw good money after bad because we know that’s a quick way to the poorhouse.
• 6. Have Patience: It takes years to master trading as an advanced skill; even then, you are never done learning or adapting.
• 7. Buy 52-week Highs, not 52-Week Lows: Don’t be afraid to buy stocks making new highs. The garbage sits at the bottom of the market along with poor earnings, weakness and further downward pressure. Buy strength and the momentum moving higher. Stocks are typically priced at the levels they trade for good reason. This applies to most premium items in life.
• 8. Ignore the Talking Heads: Do not listen to the stories, gossip and rumors flying around on network television, stock forums or the major financial newspapers. It a surefire route to bad information and clueless advice. Do your own research; you’ll come out much further ahead. This applies to crappy blogs and internet sites as well.
• 9. Understand Technical Analysis: Fundamental analysis is a solid part of my trading system but technical analysis brings in the dough. You must learn, understand and use technical analysis on a daily basis. Fundamental analysis tells me what and technical analysis tells me when, where and how.
• 10. Control Emotions: Enough said – You must control your emotions or the game is over! Understand you!

Characteristics of Trend-trading Shorts

Most ideal longer term trend shorts take four to twelve months after the peak price to setup on the weekly chart with the majority of these shorts triggering between six to nine months.

• Look for stocks that had prior up-trends and support levels that can now act as downward resistance or entry areas.
• Once a stock tops and starts to consolidate, you want it to slice through the 50-d moving average and then the 200-d moving average.
• A crossover between the 50-d m.a. and the 200-d m.a. is ideal and is graphically presented on the KNOT chart
• The odds of success increase with each failed attempt for the stock price to recover these major long term moving averages.
• Head and shoulder tops can also serve as ideal setups for potential shorts if they take at least five months to develop.
• A decreasing relative strength line and a negative pattern on the point and figure chart can also confirm that the stock is rolling over and setting up an ideal short.
• Finally, volume should be increasing and the stock should be under distribution as it violates the major moving averages and starts to break former support levels.

CROX Example:

• Will CROX get Eaten?
• CROX getting Swallowed

To initiate a short sale, you must place the order with your broker or online brokerage by determining the size and price at which the trade will occur. Your broker or brokerage company will check to see if shares are available in the specific stock selected or if they can borrow the shares. Once they are available or can be borrowed, they will be sold in the open market on the first plus tick or continuation of an up-tick also known as zero-plus tick (the stock must move up for the transaction to complete). To close the short position, the broker will purchase the shares using the original proceeds and return the shares to the third party.

As a short seller, you believe that the price of a particular stock will fall in value over time. For example: by establishing a short position for 100 shares in XYZ at $50, the broker will place $5,000 into your margin account. If the stock falls over the next few weeks and you decide to cover the short at $40, you will initiate a buy for 100 shares in XYZ using the money placed in your account when you sold short. The cost to buy back the shares in this example will be $4,000 or $1,000 less than the original short sale amount. This difference in price will result in $1000 cash that will now become your profit.

On the flip side, if the stock was to jump to $60, you would most likely cover your short or have your stop loss triggered, buying back the shares at this price. The cost would be $6000 or $1000 more than the original short sale, resulting in a 20% loss. The broker would take the additional $1000 from your cash account to cover the loss in the short sale. This is how you can lose money when shorting stocks. The higher the stocks rises, the more money you can lose, theoretically resulting with an infinite loss (excluding stop losses and broker margin calls).

If the stock rises in price or if the value of the stocks you are using as collateral goes down in price, you may be forced to add cash to your margin account or cover the short sale prematurely. Keep in mind that you must pay any dividends issued while you are short a particular stock.

The two basic reasons for selling short would be to profit from a stock that you believe is grossly overvalued (fundamentally or technically) or to hedge your account with protection from a down-swing in prices due to anticipated or unexpected events. If the stock continually fails to recover these key trend lines, a further decline may be in the immediate future and you may want to profit from this action. In the second case, you may own several stocks and fear a market downturn is on the horizon but don’t want to sell for certain reasons. Instead, the investor can short specific stocks to hedge their account against possible down-turns. Some investors diversify their portfolio with several long positions and a few short positions.

A short should be covered when it rises above the 200-d moving average and certainly covered when it rises above the 50-d moving average (especially if this line is above the 200-d m.a.). If the relative strength line starts to rise, gradually making its way to new high territory, I would advise covering the short position before a big breakout occurs.

Shorting stocks may contribute to a more consistent strategy throughout up-trending and down-trending cycles. As I have said in this blog before, shorting is not for everyone and nothing is wrong with sitting in cash during bear markets, awaiting the next breakout and a fresh batch of leaders.

Many traders believe that the most obvious area to place a short would be near the peak of stock’s trading range but I have found this to be untrue. Stocks making higher highs usually continue to make new highs so stay away from this strategy.

Additional criteria for shorting candidates can be decelerating earnings and sales and a relative strength line heading down. Investors can also take the characteristics that we use for locating long positions and reverse the criteria to develop a list of possible short candidates. Even familiar chart patterns can be used to spot shorts; the reverse cup shaped base, the head and shoulders pattern and/or the flat base with a stock breaking heavily to the downside on above average volume. Industry groups that are becoming weak or are showing multiple stocks falling and breaking through key trend lines should be noted on a watch list. If one stocks looks like a short candidate, look for additional sister stocks that may have the same set-up. Remember, stocks usually move in groups whether they go up or down.

Setups for Selling Stocks Short

Most important: Always cut your losses quick! This rule applies to any strategy in the stock market.

For the record, I don’t sell just because the calendar says May but I do enjoy sharring the statistical data (it is very interesting):

Worst six months of the year begin in May:
* All data is from the DJIA from 1950 to 2005

• A $10,000 investment in the DJIA compounded to $544,323 for the period beginning in November through April over the past 56 years (termed the best six months)
• Compare this to a $272 loss; yes I said loss for the same investment in May through October (termed the worst six months)
• 44 of the 56 periods ended with a gain in the November through April period
• Only 33 periods ended with a gain versus 23 losing periods in May through October
• The average gain for the November through April period is 7.9% (56 yrs)
• The average gain for May through October is 0.3% but the period did have an overall loss of $272 as mentioned above
• The best six months gained 11,691.79 Dow points over the 56 yrs (data ends in 2005)
• The worst six months actually lost 538.98 Dow points
• Top performing period for best six months was a gain of 29.8% in 1985 and then 25.6% in 1998
• Top performing period for worst six months was a gain of 19.2% in 1958 and then 16.9% in 1982
• The poorest performing period for the best six months was a loss of 14.0% in 1969 and then 12.5% in 1973
• The poorest performing period for the worst six months was a loss of 25.2% in 2002 and then 22.4% in 1974
• The best six months has only had one losing period in the past 22 years and that was only 2.2%
• The worst six months has had eight losing periods over the past 22 years with several in double digits
• Seven of the past eight years have been losers for the worst six months
• All of these results are based without timing the market using technical analysis
• Using a simple MACD indicator to time the entries and exits, the gain during the best six months rises up to $1,548,121 while the loss during the worst six months increases to $6,646.
• Finally, five of the last nine May months have been down for the markets; starting the period of the “worst six months”

One side note: the Stock Trader’s Almanac notes that the Nasdaq actually has a best eight month period from November to June.

For further detail, grab a copy of the Almanac as I buy one every year for the excellent statitical information and the great quotes.

For all CP sell articles, visit my category on selling or short selling!

This is what I had to say a few weeks ago in my post titled DryShips (DRYS) Drying up?

All in all – I am not a buyer of the stock at this level. It may be a solid short term buy for traders that make these types of plays such as Blain and Rajin but it does not fit into my criteria for a trend trading opportunity.

I see a decent consolidation over the past few months but I have a problem with the current pattern that is forming if it does not test former highs near $130. Volume is increasing as it moves higher but the stock is starting to struggle near the last peak of $88.

I stick to my original analysis as I am watching the stock from afar or the weekly chart. I am not day trading DRYS or any stocks for that matter so I can cut through the noise and view the market on a weekly basis to assess the “true overall trend”. Don’t get me wrong, many traders made money on the recent spike in DRYS but I wasn’t touching it with a 10-foot pole. I look for the big runs and couldn’t be bothered with a few points here and there (and I am not about to support my broker with constant buy and sell commissions, even if they are minimal).

The easiest way to characterize this trade and the market in general is to view it all as a risk/ reward potential or an expected value, as I wrote yesterday. DRYS was not a +EV trade in my trading system but, it very well may have been an excellent +EV trade for a shorter term day trader such as Rajin or Blain.

Anyway, here are a few more charts that are starting to look suspicious (some more than others). The bottom line or point of today’s rant is the fact that I still feel that the market is headed for a decline or as I phrased it a couple weeks ago:
The Big Decline (long term perspective of course).

These charts are just examples as many more exist but they were some of the first I viewed Thursday night:

“Higher oil, rate-hike fears and new regulations in the financial sector handed stocks their biggest beating in nearly a month…”

- Stocks Get Hit In Heavier Volume, By Vincent Mayo of Investor’s Business Daily.

There is some truth to the statement above but the charts have clearly been raising red flags that this market may be heading lower. I highlighted this trend over the past week or so I as I started to see the same faulty charts appearing on my screens. Visit these posts to see what I have been saying over the past week:

• The Big Decline
• DryShips (DRYS) Drying up?
  (By the way, DRYS was down 2.87% on above average volume – distribution)

The NASDAQ, DJIA and S&P 500 fell about 1.8%, 1.6% and 1.8% respectively as crude oil was up $1.69 to close above $123 a barrel (a new record).

I originally started to point out market troubles back on March 14, 2008 in a post titled Snapshot Friday; I highlighted both the Dow Jones and NASDAQ with clear yellow shaded areas showing the 200-day moving averages pointing down for the first time since 2003 (that’s huge if you ask me).

Yes the market is now higher than it was in March but the recent bounce is smacking up against the 200-d m.a. for the first time since 2003 for both indices. The last time the market crossed below a down-trending 200-d moving average and couldn’t recover was back in 2000 and 2001.

So what does that mean? As I said yesterday, I think it means a possible Big Decline.

The Dow Jones is now back below the 200-d m.a. and is failing to challenge recent highs. The day’s action came on above average volume which makes today pure distribution.

I hate to pick tops but we may be coming off the official top of the bull market that lasted from 2003 to 2007.