Thursday morning, the news broke that David Einhorn’s Greenlight Capital had filed a law suit against Apple demanding that it give a bigger portion of its $137 billion cash to investors by issuing preferred shares.
Much has been written in the media about the details of the lawsuit. Not much value is to be added for the reader by regurgitating the details. The point of this column is to help the reader trade to generate profits on Apple AAPL based on Einhorn’s move.
The time when Einhorn’s news broke is marked on a 60-minute Apple chart in an orange callout.
Please click here to see the chart.
Earlier Thursday morning, the stock had traded as low as $453.50. As the news broke, the stock spiked; it started losing momentum as it reached the resistance line shown on the chart around $465-$466. Note that the resistance line connects the high on Feb. 6 and high after the gap down post earnings. Since the stock was losing momentum as it approached resistance, a deep pullback was expected. Apple stock promptly followed the script and retreated to the support level at $454-$455.
To take a trade with conviction, it is important to have a deep understanding of the recent trading history. On the right-hand side, the chart shows the point when Apple stock fell over 10% right after reporting earnings. The fall in Apple stock was exasperated by hunt and destroy algorithms specifically designed to take out stops.
My regular readers on MarketWatch were alerted on Jan. 28 that on the previous Friday, Apple had dipped into the top band of our buy zone for a trading position. Of course, our subscribers were alerted on Friday, and aggressive investors were able to start a trading position around $435-$437.
Several factors went into the determination of the buy zone; most of these factors are based on fundamental analysis and quantitative analysis. MarketWatch readers as well as our subscribers got another opportunity to initiate or add to the position on Monday after the publication of the article as marked on the chart with a green call out. As the chart shows, there was another opportunity to initiate or add to the position on Feb. 5 when Apple again dipped into the buy zone.
For clarity, this is a short-term trading position around a core position, which is currently held for the long-term. It has been our experience that by surrounding long-term positions with short-term trading positions, returns can typically be enhanced by 50%-100%.
Getting back to the chart, after making a low post-earnings fall, Apple stock staged a minor bounce and then fell again. However, as shown on the chart, the new low was only slightly below the prior low. This indicated that there was a strong probability the selling was exhausted, at least for the short-term…Read more at MarketWatch
