Market Commentary: How To Trade Perfectly

It’s impossible to trade perfectly, but you can find perfect trades. To do so is a whole lot simpler than it seems, but it requires conviction, and discipline. Below, I’ll walk you through an example of a recent trade shorting Apple to show you how to capture profits in a hurry.

Apple is an old favorite, not because it’s the most highly capitalized firm in the stock market but because it has a history of respecting technical trends well.

Apple share price had been in an uptrend since March, and eagle-eyed investors were watching for the staunch support line to break. As it turns out, it did break on a closing basis at one of the most perilous times for traders, right before earnings.

Key Points

• When a stock breaks support, the rules dictate exiting long positions or entering short positions.
• The “story” behind the stock acts as a tempting lure to stick with a losing position, but it often just gets worse with time as the chart shows below.
• Follow the rules, as difficult as it may seem at the time, in order to keep losers in check and let winners run.

In early August, right before earnings were announced, the stock broke its long-term support line. And before the market close, an opportunity to go short appeared. This is a notoriously difficult trade to make because technically the stock is “a short” but with earnings a few hours away, the risk of good news trumping the technical trend is high. Still, if you believe price includes news, and those in the know were selling ahead of the event, it was a clue to either get out if you were long, or short if bearish.

As you can see from the trade below, the short could be entered at the close right before earnings at about $191 per share. The break of support led to a cascading share price; it fell into the $170 region within just four trading days. Or in other words, a whole summer or gains were wiped out in less than 5 trading days.

When a stock moves that quickly, it’s usually a sign that a bounce is on the horizon, which warrants taking profits to lock in gains. In the case of Apple share price, you can see it fell so fast that it went well below its lower Bollinger Band.

While nobody can predict precisely how the stock will behave, it’s imperative to follow the rules, which dictated exiting longs or shorting on a break of the long-term support line.

At the same time as this short trade was placed, a host of bulls stood staunchly behind each downward move believing a bounce would occur. Over time, they will surely be proven right. That’s the nature of Apple. More revenues, more cash, more products, larger ecosystem.

But short-term, to protect capital, it’s best to avoid a narrative, no matter how compelling, and stick only with the rules that dictate moving the trade in the direction of the trend, from bullish to bearish on the break of support.