In stock trading, twin practices have coexisted for ages. First, a large number of investors enter stop-loss orders to protect themselves. Second, such stop-loss orders become sitting ducks for some professionals.

In the past, it was a common complaint that market makers and brokers tended to run the stops. These days hunt-and-destroy algorithms have evolved to run down the stops. Such algorithms simply try to guess where the stops are grouped, and if stops are hit, the algorithms take advantage, first, by short-selling and then buying to cover. The complexities are overly simplified here to illustrate the point.

Apple Is vulnerable to stop running

Monday morning, Apple AAPL  dipped to $497 in the premarket as both The Wall Street Journal and Japan’s Nikkei reported that Apple had cut orders for screens and other parts for the iPhone 5. According to Nikkei, Apple has asked Japan Display, Inc., Sharp Corp, and LG Display to cut the orders for the iPhone 5 screens by about one half. According to the report Apple has also cut orders for other iPhone components.

This was a regurgitation of old news. Recently, a number of analysts have cut their targets and/or estimates on Apple based on supply-chain checks. Never mind that the news was old, and jittery investors pushed the stock below $500.

Also sold off were Apple component suppliers such as Cirrus Logic (CRUS), QUALCOMM (QCOM), Avago Technologies (AVGO), Broadcom (BRCM), TriQuint Semiconductor (TQNT), Skyworks Solutions (SWKS), and SanDisk (SNDK). Electronic assembly outfits such as Jabil Circuit (JBL) and Nam Tai Electronics (NTE), not known as major Apple vendors were sold off in sympathy.

As the day progressed, and Apple stock attempted to stage a mild recovery, telecommunication stocks including AT&T (T), Verizon (VZ) and Sprint (S) lagged.

The point is that Apple is vulnerable to further selling. If such selling takes place, stop running by hunt-and-destroy algorithms is highly likely.

Know where the stops are

The first step in protecting yourself is to know where the stops are congregating.


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