In my previous post on stock “muscle memory” I discussed the three types of MM. I want to revisit the topic and see how we used the same concept while tracking AAPL’s price action for the past few weeks.
On June 12th AAPL traded below 435 after not breaching that level for several weeks. After a few days of consolidation it setup for a low risk short entry that triggered on June 19th. For the next week in our morning meeting if AAPL was mentioned it was discussed in the context of a “short trade”. Without a dramatic change in price action or until it approached last quarter’s 392 support area the focus needed to be on the short side. This is the subset of “muscle memory” I describe as repeating large moves from prior inflection points. But in this instance it kept our focus on the short side prior to looking for a reversal setup at the inflection point.
What you will find with many traders is that if they haven’t entered a short trade below 429 when the initial break of consolidation triggers that they will try to fade AAPL after it has dropped for a few days at 415, 410, 405 etc. until they have lost a bunch of money. Then when the long trade finally triggers they sell quickly or put on less risk because of the prior fade losses they have suffered. So by understanding AAPL had the potential to revisit its post-earnings support area that urge to fade can be squelched and keep the trader in a position of strength if a reversal setup does in fact occur.
On the flip side once AAPL trades through 392 and reverses intra-day above this level you have a long signal. And understanding that previous bounce from 392 led to a 70+ point up move will remind you to stay focused on the swing long as it breaks out of its most recent downtrend the following day.
I would note that the recent uptrend traveled around 30 points in three days, which is a more powerful up move than the down move that triggered on June 19th. As stocks generally go down much more quickly than they go up this is short-term bullish price action. If AAPL closes above 421 look for a move back to 429 quickly.
Steven Spencer is the co-founder of SMB Capital and SMB University and has traded professionally for 17 years. His email is [email protected].
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