Gil Morales and Chris Kacher

AAPL (Apple Computer, Inc.) exhibited railroad tracks over the prior two weeks from February 27 - March 9, 2012. Many investors grew concerned that AAPL was potentially topping since it was technically overbought. Overbought/oversold indicators such as Bollinger Bands, RSI, and other indicators are used by some traders quite liberally.

Use of such indicators not only adds a considerable amount of additional noise to one's analysis, but is liable to scare one out of their position. The use of too many moving averages and overbought/oversold indicators could easily give one multiple excuses to sell prematurely. And since the market often climbs a wall of worry, the heavy dose of negative headline news further increase the odds that using such indicators will cause them to sell well before the stock has topped. Indeed, many of these indicators are short term oriented, so fail to see the long term trend in a stock or index.

Based on present technical action, the uptrend in AAPL is alive and well. Next stop most likely 600, barring some negative action in the general market, since most stocks correlate to some degree with the direction of the general market. That said, there may be a tiny number of top stocks that can buck a downtrend, so we run our screens throughout the day at, regardless of the action of the general market.

And on February 15, 2012, AAPL had a high volume downside reversal, after a huge move in prior weeks. Such action can occur around stocks that are topping. But while it is true that such high volume downside reversal patterns may be observed in a stocks that are topping, the converse which says that leading stocks that exhibit this pattern probably means a top, is often not true.

And market context always plays a role, which can throw an investor off track if they put too much emphasis on such labels. For example, a cup with handle basing pattern may look flawed but in actuality be a strong pattern when taken in context with the general market. SCHW (Charles Schwab Corp) exhibited such action from the basing pattern it formed from July - October 1998, so those investors who got caught up in labels figured the pattern was flawed thus failed to participate in SCHW's massive move in the ensuing months, when it rocketed from a split adjusted price of 9 to 51.67 in just 7 months.

Thus, there is no need to debate these technical labels, of which there are many (square box, 3 weeks tight, saucer, etc). And our 7-week rule can keep one in the big part of a stock's move. The rule is discussed here:

Gil Morales and Chris Kacher

Gil Morales and Chris Karcher are co-founders of the Virtue of Selfish Investing.