Let’s look back to September 21st of 2012. Apple had just hit a new high at 705 and the S & P 500 was trading at 1460. Today Apple is trading at 438 a decline of 38% from it’s high while the S & P 500 is currently trading at 1638 an increase of 12% over the same time frame.

One of the keys to success in the stock market is limiting your risks. That entails the use of trend lines, stop orders and sometimes it’s just taking a close look at a stock’s price movements. Just because the market is strong doesn’t mean that every stock in the market will be strong. Apple had been very successful much like Microsoft had in the 1980’s through the late 1990’s.

Revenues became so large that it became harder to show the kind of earnings increases that investors had become accustomed to. Both of these companies experienced competition and a maturity in their products that had made them great!

Below is the story of Apple:

(The white line is a comparative line of the S & P 500)

comparison apple and s&p 500

One early warning sign for a stock is giving up gains near the top of a move, though it could happen elsewhere. Stocks advance because demand is greater that supply. If a stock doesn’t hold its advance, giving it all back, that suggests that someone took advantage of the stocks recent strength and sold more stock than the buyers will willing to buy. This is a sign of weakness and is a bearish signal.

sign of weakness

What about a stock that quickly recovers from a loss? This sign is more bullish than bearish because the sellers have been overcome by the buyers. The buyers have absorbed the supply of stock thereby reducing the floating supply and opening the door for further advances.

sign of strength

Apple stock breaks it’s trend line:

apple breaks trend

It’s easy to get caught up in owning a magical stock. I remember back in 1999 when I advised a client to reduce his holdings of Microsoft. He had close to 2 million dollars of the stock in his IRA account. There were a number of things going on with the stock but the primary concerns were an extended advance in stock price, reaching a price objective and a bubble in the stock market. We put a sell order for half of his stock on December 31st of 1999. The client called the next trading day and cancelled the order to sell his magical stock. Microsoft stock is still down 30% from its high in 1999 and it is 13 years later.

Another Look at Microsoft: 

Let’s look at Microsoft this year, things have changed considerably with the building of a cause and the creation of a price objective.

Before you can have a trend you need to have price movement. You need to build a cause first. This is identified as a trading range between support and resistance points. Movement out of the trading range creates the price movement that begins to define the  trend.

microsoft point figure

Microsoft develops a trading range between 23 and 26. There is a point and figure count of 21 (7 x 3) at the 24 point level, which projects out to a price objective of 44. I now need to create a trend line and a stop order to protect my investment.

Since Microsoft has just started it’s move the trend line is not too steep. A price movement below 32 would be a sign of weakness so I would initially set a stop-loss order at 31 1/2. By doing this I am thinking ahead and limiting my risk! The trend lines need to be followed and will have to be adjusted over time, it is just part of being an investor you need to be involved.

microsoft uptrend

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