Many of you who have been reading my comments regularly know that I've been watching Google and Apple for a contrarian counter-trend trade as my thought was that they were over-bought. Over the past month, I pulled the trigger on Google by selling calls on Jan 7th. Soon after Google had a correction and is now in the stable stage. AAPL however, seems to be making new highs everyday.
I see a panic-buying pattern emerging here which as a contrarian short-term trader I want to play against. Below is the daily plot of AAPL with my trendlines:
The indications for local bubble are all here. AAPL is making new highs fast on lower volume, the 14 day RSI indicator is in over-bought position, and the MACD has started to tick down. Furthermore, for the past couple of days we've had small candle sticks at the top trading at a tight range.
I will look to short the stock or buy puts. Shorting will give me better mobility in and out of the stock should it turn against me. The reason I will short the stock or buy puts versus selling calls is because the potential for profits for selling calls is limited to the premium while the upside is virtually unknown; if the stock skyrockets, I'm on the hook as far up as it goes, similar to shorting the stock... so why not just short it and maximize potential profits.
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