Is Apple (AAPL) Oversold?

By Lawrence G. McMillan

This is an article about Apple, but in a more general sense it is an article about whether the “modified Bollinger Band” system can be applied to stock charts.

Last week, after AAPL dropped once again, bringing it more than 15% off its April highs (that were almost equaled in July, just prior to the earnings). This prompted an analyst on TV to say that the last six times that APPL had been more than 3 standard deviations below its 20-day moving average, it has rallied back to the 20-day. The first problem with hearing a statement like that, is that it leaves a lot of questions unanswered: a) what about the six times before that?, b) what volatility are you using to compute the standard deviation?, c) how long did the rally take (i.e., did you actually make a profit or did the average just keep falling, so that by the time APPL hit the moving average, there wasn’t any profit at all)?

I thought this might be a good application of the “modified Bollinger Band” (mBB) strategy that we have used to trade $SPX. In the past, I have looked at this strategy with regard to applying it to stocks and futures, and usually there are just too many whipsaws in the more volatile names. In Volume 23, No. 23, we wrote an article trying to apply the mBB strategy to the Gold ETF (GLD) and to the Crude Oil ETF (USO). The results were modestly encouraging, although not anywhere near as successful as the system’s results for trading $SPX. The biggest problem was that in a sharply trending market –= the downtrend in Oil last year, for example – repeated buy signals were given because of the volatile bouncebacks along the way. That doesn’t happen with $SPX.

Nevertheless, we promised at that time to write more about applying the mBB system to other markets, and so this is the fulfillment of that promise...

Read the full article (published 8/14/15) and get the complete trading recommendations by subscribing to The Option Strategist now.