not to harp too much on any one stock but the intraday plunge in AAPL this morning confirms what i’ve warned of recently: very often when the market or any individual stocks go near-parabolic after already being overbought and over-loved (extreme bullish sentiment) for a while two things tend of happen: 1) you get a large build-up of stop orders stacked below the stock (or index) as the momo players, far too greedy to take profits at a rational level, continue to pile into the stock while riding the momentum higher with the “safety” trailing their stops loss orders below. 2) the longer this continues, the larger the imbalance between buyers and sellers become as the shorts tend to “capitulate” and give up on trying to short the stock which removes one of the most important natural buyers of the stock (as shorts MUST buy the stock at some point to close their position, whether at a gain, on a pullback, or a loss).
it is this type of dynamic that leads to the very fast, very powerful sell-off that are very hard to get out of the way of if long (as stop-limit orders often get passed by without triggering and stop-loss orders often get filled at prices well below the stop (trigger) price. usually, like just before the flash-crash in may ’10, we get a few “shots across the bow” like this, sort of akin to the minor tremors that sometimes precede a major earthquake. by itself, that intraday plunge means nothing. however keep an eye on some of the other “untouchables” (CMG, INTC, AMZN, etc…) for similar potential warning signs. here’s a 15 min chart of AAPL showing some of the more minor support levels below but if my suspicions are confirmed, any downside on AAPL and the NDX will likely lead to a vicious cycle of selling that accelerates as it goes, as one layer of stops being hit will lead to the next layer getting hit and so on and so forth…. i.e.- a domino effect.
