Monthly Archives: March 2012

Will Apple Invalidate 92 Years of Research Data?

I want to start by saying that I’ve obviously been 100% wrong with regard to my prediction calling for an imminent price collapse in AAPL shares. Granted, the stock declined sharply following our original post, but it has since moved higher, recently going completely parabolic.  I purposely left the original post below, in order to own this call, but unless ninety-two years of research has suddenly been single-handedly invalidated by AAPL, the stock will indeed crash, reaching each and every price target we originally set forth.

I’ll get to the AAPL update below, but first let me explain a little about how the BAM Model works, its inputs, and the accuracy of its past predictions.

In its simplest form, the BAM Model tracks separate price bar data ranging from monthly all the way down to 25 tick. The model works identically, whether we’re tracking an individual stock, stock index,  ETF,  commodity, or currency. Our research shows that human nature, (greed and fear, optimism and pessimism) as displayed in price action, appear the same regardless of the instrument being traded.

Each set of chart data is analyzed individually first, and then combined with the other model time frames into a master model used to make investment decisions. If we’re dealing with short-term traders, we pay close attention to the 60 minute model for trend and drill-down on 5 and 1 minute models, as well as the twenty-five tick model, to determine entry and exit points.
As we study each individual time frame–and the fractal bull and bear markets they each trace out–we use the same topping and bottoming “count” (a number commonly found in nature) in order to determine when a bull leg should have run it’s normal course, and when a bear leg should normally ensue. The opposite is done for a bear market leg and we track the exact same “count” to the downside as we look for signs that the bear leg has run its course, expecting a bull leg to ensue. For example, during a single trading session, an active, range-bound stock might cycle through three bull legs and three bear legs if we’re observing our 25 tick model. On the other hand, if a stock is trending, it might require multiple sessions to cycle through a single topping or bottoming count.

Price Extensions Explained

Occasionally, a certain fractal model will extend its count either up or down, when the fractal model of a higher degree proves overwhelming in its strength. For example, if we’re observing a 5 minute model that has run through its normal topping count number and we’re therefore expecting a price reversal, that reversal might be delayed and the 5 minute count extended if the 6o minute model has not yet topped and continues to display further zones of strength. Once the 60 minute model has either cycled through a topping count of its own, or run through all relevant zones of predicted strength, the price reversal ensues, and the 5 minute model claims back not only all price progress made over and above the “natural” topping count, but it will continue down until it traces out a full bear bottoming count. This type of action is commonly seen in false breakouts or false breakdowns where violent price reversals are seen after a market has improperly priced future optimism or pessimism. This action is also common in crashes and melt-ups where “A” tops and “V” bottoms are common.

Retest Levels and Price Magnets

Retest levels, in our work, are not based on price breakouts and price breakdowns, or commonly tracked price “gaps.” Our retest levels are based on trend line studies and a proprietary methodology we use to create “price stamps” at levels that MUST be revisited at some point in the future. In calm markets, these levels are typically retested within minutes, hours, or days after a trend break, but in hyper-volatile markets, driven by FED announcements or company specific news flow–we often observe unnatural price activity that does not allow for a normal retest to occur. This unnatural activity leaves behind excellent clues about future price action, and we exploit these clues along with other components of our model, to set up price target forecasts for the future.

When we first built the BAM Model, the focus was exclusively on boom and bust periods of the past, specifically, 1928-1932, and 1985-1987. During both of those periods, investor sentiment—driven by human nature/greed—created situations in which price moved up so rapidly that it did not allow the proper “resting time” needed for a retest to occur. The reason they ended badly though was not simply because the market had priced in excesses. Excesses can be unwound in an orderly fashion if price retest occur along the way, but when a market refuses to allow retest time after time after time, if creates a situation in which all of the retest eventually occur almost simultaneously in a straight-line. Again, upside or downside price targets, when revisited in a controlled fashion, rarely create problems in financial markets, but speed kills. It’s the rapidity of retracements that cause investment firms to implode, and that’s our concern here specific to AAPL.

Apple’s Untested Price Levels Set up Future Collapse

The fact that AAPL comprises such a large portion of the indexes is not only insane, it’s dangerous. How can the powers-that-be tout their intelligence in creating ever more complex products aimed at aiding diversification and minimizing market risk, yet ignore the fact that a single stock has achieved such a huge weighting? We’re clearly now in a situation in which a simple pullback could easily morph into something out of control. We could now see a major market decline provide the catalyst for an AAPL implosion, or an AAPL implosion provide the catalyst for a major market decline. In other words, we’re now in a situation whereby AAPL is the chicken and the egg; the dog and the tail. And since none of the previously published downside price targets have been invalidated, we’re faced with the reality that our model is now calling for an even larger crash in the share price of AAPL.

The list of untested price levels in AAPL now stand at: 426, 250, 155, and 45, and since “retests” are by nature violent events, this will almost certainly take the form of a mechanical, forced-selling type of decline. As far as catalysts, I have no clue, but let’s review a few of our past forecasts that were highly controversial at the time and see how those panned-out.

On November 12, 2007, just after the US stock market had posted an all-time high we said-

“let’s start by reiterating our bigger-picture BAM stock market forecast which points to a brutal 58% bear market decline into 2010 with the SPX round-tripping the entire 2002-2007 bull run before finding support into the SPX 680 level.” Result? The SPX bottomed in 2009 at the 667 level.

When Hovnanian was trading at 72, we published a crash target of 7 (it traded to 1).
When Crude oil was trading at 147, we published a target of 36 (it traded to 36).
When General Motors was trading at 30, we published a target of 2.50 (it traded to 0)
When Research in Motion was trading at 102, we published a target of 24, (it traded to 15)
When BIDU was trading at 310, we published a target of 187, (it traded to 100)

As for bull market “melt-up” predictions, please refer to the blog post below titled “The Unpredictable” Nature of Mother Nature.” There you’ll find our wheat and OJ calls.
All of these are examples of outrageous price predictions that came to fruition, and although that certainly doesn’t guarantee we’ll be vindicated on this AAPL call, my money remains on the model.
As you can see in the chart below, AAPL has now raced up into the overhead speedline (a typical melt-up target and resistance) and should be vulnerable to a price collapse, first to the 426 level and then down to our original targets. There’s no question that this extreme price advance has already seriously wounded my account as well as my credibility, but the cult-like behavior of the AAPL bulls, as well as the hacking of our website and constant bashing on Twitter, are all signs of an unprecedented bubble. In fact Apple’s breakout since January 20, 2012 has spawned a parabolic advance that has more than doubled the 20% parabolic blow-off high seen in the DOW prior to its 1929 top and subsequent crash. The more things change, the more they…

We’ll report back when something notable occurs.