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Close short on Apple – why it was too soon

November 12, 2012

12 November

Last week, I closed the remainder of the short position in Apple. This proved wrong, as it declined another $32 by the end of the week.

Recent examples of daily RSI divergences prompted me to close the position. This short term focus ignored a longer term development, shown here.

In my moving average crossover method, I look for stocks or pairs where the averages have had a long time since their last crossover: at least 2 years preferably 4 years. I also look for divergence on the MACD indicator. The signal is given by the moving average crossover.

Scanning for stocks against Apple, there are many that meet the 2 year criteria and have just crossed over. Changing the criteria to 4 years shortens the list to financial stocks, ETFs and indices.

Apple (AAPL) v SPDR Financial (XLF)

Aaplxlf_weekly_macd_121112

  • Four years have passed since the last moving average crossover – in November 2008
  • Divergence has been in place on the MACD indicator throughout 2012
  • A bearish RSI divergence formed in April 2012
  • The moving averages crossed over at the end of last week, signalling the long term rotation away from Apple and in favour of financial stocks
  • In the short term the ratio is oversold

When long term rotations occur, short term oversold/ overbought can persist and short term divergences can be blown away. Thinking a bit more about the long term rotation could have helped with not taking profit too early on the Apple trade.

The long term crossover is not a precise timing signal. The ratio could easily rally back to the falling moving averages before falling again.

 

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