This is a free sample of Wall St. Cheat Sheet’s new Tech Cheat Sheet Premium. Apple (AAPL) is currently 10 points above David Gibbs’ recommended entry price of 226.47 …
Apple Inc. (AAPL) requires little introduction. The designer, manufacturer and retailer of consumer electronics is both a household name and often the apple of Wall Street’s eye. Always the toast of the town for one reason or another, the fast-approaching release of the iPad has been the company’s primary source of momentum as of late.
After trading from the mid-180’s up to about $215 as the last decade came to a close, AAPL began forming a base on January 6th. This base, which turned out to be a cup-without-handle, took about eight weeks to form. This is comfortably above the six to seven week minimum that we would typically like to see. Shares finally broke out on strong volume on March 5th on news that the iPad would be released earlier than the Street had originally expected.
The buy-point for a cup-without-handle pattern is $0.10 above the high of the first down-bar in the pattern, or $215.69 in this case. The buy-more entry is at 226.47.
Once I see a breakout, I always make sure to get in before shares have run up more than a few percent, as buying into a move that’s too extended forces you to take on a variety of risks. First off, and quite obviously, stocks do not go up forever. The further you buy into a given move, the less profit you can expect to accrue. Thus, buying in too late necessarily narrows your risk-reward calculations.
The second, and slightly less obvious, risk you take on has to do with your stop-loss. Capital preservation is the name of the game, and as long as you limit all of your losses to no more than 7%-10%, you’ll never suffer the single, Pacquiao-esque knockout blow that affects so many traders’ portfolios. On top of that, breakouts often re-test their breakout points. As a result, buying into a move that is too far extended will often result in a triggering of your stop-loss as part of a move that is, in a reality, a regular pull-back.
Here, shares are only 3% past their breakout point, which is not so bad. I tend to consider 5% above to be the rough ceiling of where I’d be willing to get in. I think you’d be okay getting in anywhere between the breakout and Friday’s close, perhaps giving your stop-loss a bit more room depending on how far beyond the breakout you begin your initial position.
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