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Can a Single Stock Pinpoint a Market Rally?

 November 20, 2012 01:48 PM
 


(By Jim Nelson) After a downright terrible month, the stock market snapped back to life this morning.

An oversold rally in one form or another was inevitable — and we finally got one today, as the S&P shot up a more than 1.5% before lunch even began. Just for some perspective, as of this Friday afternoon, the Nasdaq and S&P 500 had posted only three positive days so far in November. Today's rally (if it holds) will be only the fourth green day in a month that's quickly getting away from us…

So while I don't know if this big move will stick, a rally was certainly due. Whatever the reasons assigned by the financial media, stocks are up big today.

But what if I told you there was a way to guess snapback rallies like today's — just by watching a single stock?

[Related -Google Inc (GOOG): Why Nest Labs Deal Is A Wakeup Call For Apple Inc.?]

It's strange — but true. There's one stock out there that appears to be leading the market around on a tight leash these days. In fact, using this stock as a leading indicator would have worked perfectly going into this week's Thanksgiving rally. All you would have had to do is bookmark the stock's chart and keep a close eye on its daily movements.

So let's take a look at this stock — and see if this little saying really is true: "So goes Apple, so goes the market."

Here's a look at Apple Inc. (NASDAQ:AAPL) since the beginning of the June rally:

[Related -Apple Inc. (NASDAQ:AAPL): Why Gross Margins Will Expand In 2014 and Beyond?]

Look at Friday's trading action (red circle). Apple shares started the day sharply lower, sinking close to $500 before midday. That's when the switch flipped. In the early afternoon, shares rallied hard and the stock turned a big loss into a small gain before the afternoon bell.

That's what created the extremely long lower shadow on the circled candle — and a very bullish short-term setup called a "hammer" because of its shape. And as you can see, shares of Apple had no trouble following through during today's trading session. By late afternoon, the stock was up more than 6%.

In contrast, the S&P 500 and other major indexes did not display as strong of bullish setups Friday afternoon. Yes, stocks were up to finish the day. But the broad market's morning decline was not as steep — so the market didn't show us the strong, bullish hammer that we saw in Apple shares.

Apple indicated a strong sentiment shift Friday. If you bought on this signal, you would have made a fine trade, even though the broad market had yet to signal it was prepared for a powerful oversold rally.

A few of the finer points to think about:

First, it's important to realize Apple stock is unique due to its size and the sheer number of casual and professional investors who follow its every move. It's a highly profitable company whose stock sometimes trades like a biotech momentum darling. The stock is a staple in virtually every fund in the country. Almost everyone with a 401(k) or IRA or just someone who enjoys dabbling in the market has some skin in Apple Inc.

Obviously, such a popular stock will grab headlines. But Apple is doing more than that lately. It's become a market barometer you can use as a crude sentiment indicator.

I'll explain what I mean in a second. First, take a look at this chart of the S&P 500 over the same time period:

I'll get to the annotations in a minute. But for now, just concentrate on the price action…

Obviously, an overlay of AAPL on top of the S&P wouldn't be perfect. After all, Apple began its most recent decline in late September (not mid-October). And Apple's retreat was more pronounced than the broad market correction so far.

Forget matching up the charts exactly. Instead, I want to draw your attention to how Apple's turning points are preceding the broad market's since the summer. A quick comparison of the two charts tells the story:

Apple bottomed and moved higher in late May; the broad market followed in early June.

Apple topped in September; the broad market didn't indicate a double top until October.

So was Friday's bullish candle from Apple big enough even to forecast a bounce in the S&P? I can't promise this relationship will hold up. But the S&P is reacting perfectly to our third retracement level I've been documenting over the past couple of weeks. If we do continue to move higher from here, we can look back at these levels as technically significant.

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