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How to Trade Some of the Most Conspicuous Price Phenomena: Gaps and Windows

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Overview

“Gaps” (as they are called in the West) and “windows” (their Japanese counterparts) have always attracted the attention of technicians – most probably because they are nearly impossible to be missed on a price chart. After all, a trading session lying completely outside of the prior day’s range, which is what gaps and windows are by definition, must carry some kind of predictive power. However, a critical question remains – are gaps and windows indicative of the beginning of a new trend (as it was the case for AAPL in Figure 1), or are they simply an overreaction and are subsequently quickly filled (as it was the case for MMM in Figure 2)? Notice how in the former case the gap stayed opened (and it still is) for more than a year, whereas in the latter case the gap was filled/closed within two months (i.e. subsequent price action in September completely overlapped the range of the gap).

Figure 1. AAPL Daily

Figure 2. MMM Daily

Note, from here on, only the term “gap” is used, even though there is an important difference between the two – “gaps” look at intraday prices when determining if they are “filled”, whereas “windows” only look at “closing” prices. At the bottom of the article, you can find references to several works on the price phenomenon, in which the difference between the two variations is discussed in-depth.

Given that gaps occur quite frequently (see referenced materials for details), it is easy to understand how any “gap” strategy can be depicted to have predictive power. Most traditional books on technical analysis include a list of gap trading strategies followed by a few stellar charts that are supposed to prove the strategies’ validity (charts similar to Figures 1 & 2). Furthermore, given gaps’ conspicuous nature, most traditional trading strategies have their “entry” on the day the gap occurs (or Gap Day). For example, proponents of gaps being a continuation pattern would suggest that taking a position in the direction of the gap on Gap Day is profitable. On the other hand, technical analysts who believe that “all gaps get filled” suggest taking a position on Gap Day in the opposite direction of the gap. In both cases, action is taken on Gap Day.

After trading and analyzing gaps for many years, I was certain that traditional theories do not work the way they are described to. Probably the most illogical stipulation made by various technical authors was that “the gap itself should serve as support or resistance” and “once filled, gaps become insignificant”. On the contrary, I had found that the gap itself is rarely a strong support or resistance and that very often the most significant gaps are those that have already been filled. This is when, in 2016, I developed a new theory on gaps (“K-Divergence), which significantly “diverges” from traditional theories.

Before discussing what the K-Divergence theory entails, an explanation of the most popular traditional theories is presented.

Traditional Gap Theories

1. A gap is a continuation pattern.

Strategy – taking a position, on Gap Day, in the direction of the gap.

This theory is based on the idea that if, on any given day, prices jump/fall significantly enough to never touch the prior session’s price range, something significant must have occurred and changed the market’s sentiment on the company. In this case, on Gap Day, prices are assumed to reflect the changing opinion of the stock only partially, and thus, further movement in the direction of the gap is expected. In the case of AAPL’s gap (Figure 1), on February 1, 2017, the company reported better-than-expected 1Q17 earnings on the heels of record breaking iPhone sales. Subsequently, the price continued moving higher in a swift fashion, leaving the up-gap behind it. Often, proponents of this theory use support and resistance levels, or technical indicators, as a confirmation that the gap has occurred at an important juncture and that it can be trusted. For example, zooming out and looking at the stock’s price action since 2015 (Figure 3), traders who utilize gaps as continuation patterns can claim that “the breakout occurred above the interim high of the multiple bottom formation, and therefore, carried high predictive power”.

Figure 3. AAPL 2-Day Chart

2. A gap is an overreaction.

Strategy – taking a position, on Gap Day, in the opposite direction of the gap

Advocates of this theory are convinced that gaps are a result of market participants overreacting to news (or “noise”) and that once participation subsides, the gap is expected to get filled. The famous adage “all gaps get filled” is often used in an attempt to support this supposition. Similar to the previous strategy, support/resistance levels and technical indicators are expected to provide further confirmation if the particular gap is to be filled. For example, looking once again at the MMM chart (2-day chart – Figure 4), one may say that the down-gap took prices close to a well-established uptrend (green trendline) and to a key moving average (100 SMA – yellow line). Also, to further support the thesis that prices will reverse, one may point to the positive reversal in RSI (not to be confused with a positive divergence), which indicated that the correction has taken the stock to oversold levels during the uptrend (i.e. RSI making a lower low, while prices making a higher low).

Figure 4. MMM 2-Day Chart

The above two strategies are a perfect example of technical analysis being more of an “art” than “science”, where it is up to the technician’s discretion to decide what action to take after observing a gap. While, after testing both strategies (see K-Divergence section), I found that neither the simple continuation nor reversal strategies are profitable on a systematic basis, there are definitely specific situations where the probability of a gap reversing is higher and vice versa. Unfortunately, the next strategy, the one found in almost any TA book, is one of the reasons why technical analysis has a bad name among most non-technicians.

3. A gap could be either a continuation pattern or an overreaction based on its “classification”.

Strategy – an ambiguous one based on hindsight

As it had become evident that gaps cannot be all “continuation patterns” or “overreactions”, the popular gap classification system was born – where gaps are categorized as either “breakaway”, “continuation/runaway”, “exhaustion” and “common”. This classification is based on two criteria – 1) the location of the gap relative to preceding price action and 2) whether the gap gets filled or not. However, as one can imagine, there is no way to know on Gap Day whether a gap will be filled in the future. That is, the classification system is based on hindsight. Let’s prove this point by looking at an example. Figure 5 shows an up-gap after a prolonged uptrend. Based on the widely-used classification system this gap can be “runaway” (if the gap does not get filled and prices continue higher), “exhaustion” (if prices quickly reverse, fill the gap and continue lower) or even “common” (if prices fill the gap but do not reverse or consolidate). Given the colour of the candle and the long upper wick, it seems like it is an “exhaustion” gap, right?

Figure 5. Daily Chart (real chart, ticker hidden)

Clearly, it is only in hindsight that this gap can be classified. In this case, the gap turned out to be of the “runaway” type as it did not get filled and the stock (MSFT) continued propelling higher (Figure 6). The point is, the classification system is futile for making decisions on Gap Day.

Figure 6. MSFT Daily Chart

K-Divergence (K-Div) Theory

4. Most gaps occur after prices have moved away from a significant support or resistance levels.

Strategy – taking a position in the direction of the gap, only after prices have returned to pre-gap levels

More specifically, the theory suggests that in most cases an up-gap transpires after prices have already jumped from a key support level and a down-gap – after prices have already fallen from a key resistance level. The theory is based on the premise that before a gap occurs prices have already reached a key level and have bounced from it. It is only later on, after most market participants agree on the direction of the next move and take positions in the same direction that gaps occur. This means that it is not the gap itself that should serve as a support or resistance, but rather the range of prices preceding it (pre-gap range). The most important implications of the theory are – 1) the gap itself should not serve as support or resistance and 2) a filled gap is not “insignificant”.

So why does the K-Divergence make sense from a technical point of view? After all, if prices gapped due to “news” that nobody was aware of, this would mean that gaps are nothing more than prices adjusting to the new information. Any such conclusion should render fundamental and technical analysis useless, for it would imply that no analyst is able to purchase a security before news gets disseminated. On the contrary, the K-Divergence assumes that the most astute market participants (i.e. the best fundamental and technical analysts, quants and even “insiders”) are able to trade in advance of the gap occurring. Therefore, true support and resistance levels lie prior to the gap transpiring and subsequent filling of the gap does not render it “insignificant”.  It is best to illustrate this with an example. I will use one of my most recent predictions based on the theory, which was sent to one of my clients. First, I will describe the rational in detail with an updated chart (Figure 7), which will be followed by screenshots from the day the signal was given.

After the close on February 1, 2018, Google reported its 4Q18. The next day, the stock opened sharply lower and continued falling into the close (Feb 2 – Down Gap in Figure 7). The stock continued falling along with the market until the Feb 9 low was set. Subsequently, while NASDAQ was making new highs in early March, GOOG reached the pre-gap range (Bearish K-Divergence Range – violet horizontal trendlines) and started stalling. Due to the strong bounce by the broader markets, the stock recovered and filled the gap. However, when the stock started trading at the pre-gap range, market participants were given a second chance to sell the stock for the same price it was trading at before the 4Q18 earnings were released. Price action confirmed the bearishness of the set-up (GOOG March 13 & 16 – Figures 8 & 9).

Figure 7. GOOG Daily Chart

Figure 8. GOOG March 13

Figure 9. GOOG March 16

In order to validate the theory, I developed two trading strategies based on it (one with the gap and one with the window variation) and backtested them along with 5 variations of the traditional gap strategies discussed above. Figure 10 shows the 1-, 2-, 5-, 10-, 20-, 30- and 44-day period returns of the 7 strategies (#6 & 7 being the two based on the K-Divergence theory) and Figure 11 shows the annualized returns for the those same periods. The backtest took into account a total of 14,219 gaps over nearly a 2-year period.

Figure 10. 1-, 2-, 5-, 10-, 20-, 30- and 44-day period returns

Figure 11. Annualized 1-, 2-, 5-, 10-, 20-, 30- and 44-day period returns

The two K-Div strategies were profitable throughout all periods. The only other consistently profitable strategy was “Fading the Gap” strategy which entailed taking a position in the opposite direction of the gap on Gap Day, but closing it immediately after the gap was filled. This once again goes against traditional theories which suggest that once a gap is filled, prices should continue going against the gap’s direction as, supposedly, an important support/resistance was breached.

It is noteworthy that the K-Divergence theory does not suggest that all gaps have occurred after important support/resistance levels or that they can all be traded profitably in a similar fashion as the GOOG example. Rather, it provides a framework for analyzing the gap phenomenon, on that all active investors/traders should believe in, which assumes that some market participants are able to act ahead of major moves (i.e. prior to the appearance of gaps). Furthermore, it eliminates the use of the “hindsight” gap classification system.

For more on gaps, I recommend reading Julie R. Dahlquist and Richard J. Bauer’s “Technical Analysis of Gaps” book, where they conduct, one of the first on the topic, objective investigations of the phenomenon. For a much more in-depth coverage of the K-Divergence and my research on gaps, you can view my thesis for the Master of Financial Technical Analysis (MFTA) Program, published in the 2018 IFTA Annual Journal.

Conclusion

In the future, regardless of whether you look for opportunities to trade gaps on Gap Day (strategies 1 & 2) or decide to use the K-Divergence as part of your trading arsenal, I hope this article would make you think more critically the next time you hear terms such as the “runaway” gap. And even more importantly, will push you to analyze gaps even after they have been filled, and according to traditional theory, have become insignificant.

Happy gap trading.

Featured image courtesy of Shutterstock. 

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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    Analysis

    AMD: Time to Find the Bottom

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    By Dmitriy Gurkovsky, Chief Analyst at RoboMarkets

    With the crypto hype nearly over, it’s time to see what’s happening with graphic board manufacturers. When demand boomed, their earnings burst, and so did the stock prices. Currently, however, the demand is down, and this is clearly seen in the earnings reports. While previously the earnings reached rather high numbers, they are bound to start shrinking now. What is important here is whether the management at such companies used the large capital inflows to take the companies’ performance to the next level.

    Today, we’ll take a closer look at Advanced Micro Devices, known as AMD. We could also consider Nvidia (NASDAQ: NVDA), but its stock is seven times more expensive than AMD’s, which means it is much less available to the retail investors.

    AMD earnings had risen by 2,200% when the crypto boom was at large, while Nvidia added 1,500% to its value. At the same time, when AMD shares were at the low, they cost around $1.50, which was quite alright for retail traders, while Nvidia shares were 15 times higher.

    Advanced Micro Devices (NASDAQ: AMD) is a major GPU and chip set manufacturer. The company hasn’t had any production facilities of its own since 2009, and uses other companies’ facilities. Among AMD’s partners, one may mention Acer, Cisco, Dell, Ericsson, Fujitsu, HP, IBM, NEC, Nokia, Siemens, and Sony.

    The major competition of AMD is Nvidia. In 2010, AMD was better than Nvidia, when its market share amounted to 51%. It was actually in 2010 when the first Bitcoin transaction was made. This was the jump start for the cryptos and, eventually, for mining devices.

    By 2018, the crypto market cap reached its high at $840B, followed by the fall that has so far reached $119B. This caused a high demand for used GPUs, while the demand for new devices fell; this eventually led to the falling AMD sales. Investors booked their profits, and AMD shares fell, too. The earnings will continue going down, and the company will have to distract the investors from this.

    The forecast for earnings in the coming quarter is not positive either, which means the stock has not reached its bottom yet.

    AMD: What Happened Recently

    In October, the Q3 report came in, with both the earnings and the ROI rising YoY. The operational profit went up to $150M, while the net profit rose by 70% to reach $102B. However, even with the earnings rising (mostly due to the CPU sales), the stock went down by 22% just because GPU sales shrank. When this happened, Deutsche Bank, Mizuho, and Morgan Stanley cut their forecasts regarding AMD share price.

    In November, AMD partnered with Amazon to supply Epic CPUs for Amazon data centers. This pushed the price by 9% in the short term. Another price spike happened in December, when the 90-day ‘cease-fire’ was achieved in Sino-US trade wars; this was perceived as positive news for tech companies, and, in particular, pushed the AMD price by 7.50% upwards.

    After that, the rise was over, and the shares were falling for 20 days in a row. The last hope was the Radeon IIV GPU release, which was presented at the CES expo on January 9, 2019. The stock started to recover but then went down abruptly.

    This whipsaw may continue for long. What one may do is pay attention to the next quarter forecasts and do the tech analysis, while also watching the current and past events.

    As such, some figures may show AMD’s strong points.

    Thus, the equity ROI is 28.44%, with the overall industry number being at 11.84%; the profit margin is 5.05% versus 2.06%. On Dec 20, 2018, AMD was added into NASDAQ 100. Every year, the amount of data to process is increasing, while making the CPUs and GPUs smaller gets more and more difficult. This is likely to increase the demand, and, subsequently, increase AMD earnings, too.

    On the dark side, AMD is not currently paying any dividends, while the P/E is 49.50 versus the 14.85 industry average, which means the company is well overpriced. The forecasts for the next quarter earnings are negative, which may put the AMD shares under pressure, too.

    Thus, AMD shares may shrink in the short term, but in the longer term, they look quite attractive for investment. In order to understand where the price is going to ‘take off’, one should use tech analysis.

    On W1, the price is above the 200-day SMA, which means there is an ascending trend. Fundamentally, however, the price may get lower, perhaps finding its support at the 200-day SMA.

    The secondary support levels are at $10 and $15. $15, the nearest one, is very likely to get broken down, as it is quite far from the SMA. If the sellers get more active, the price may head further lower to reach and even break out $10. However, the odds are that the breakout will not continue for long, and a recovery will follow immediately. Thus, $10 may be considered a good level for taking long positions.

    On D1, $22 is a currently strong level. In case it does not get broken out soon, it may become then a starting point for the price to start heading towards $10.

    Disclaimer

    Any predictions contained herein are based on the authors’ particular opinion. This analysis shall not be treated as trading advice. RoboMarkets shall not be held liable for the results of the trades arising from relying upon trading recommendations and reviews contained herein.

    Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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    4.6 stars on average, based on 26 rated postsHaving majored in both Social Psychology and Economics, I went on to continue my education in post graduate. Later I worked as a team lead of a tech and fundamental analysis lab in the Applied System Analysis Research Institute. This helped me to acquire all necessary skills and experience to become a successful trader and analyst, as well as a portfolio manager in an investment company. I'm a pro in the financial field and the author of articles for various international media. I also hold the position of Chief Analyst at RoboMarkets.




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    Analysis

    Johnson & Johnson: Not the One to Go Down?

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    By Dmitriy Gurkovskiy, Chief Analyst at RoboMarkets

    With the new season ahead, investors’ fears are fading out. The market is trying to find its bottom and bounce off it, if somewhat timidly. Few investors were bold enough to get into risks before the New Year, most preferred to lock in their hard-earned profits, which subsequently led to the overall downtrend.

    There were some other reasons, too, though. The quarterly reports went better and better, which first was a good signal for keeping stocks within the portfolios. However, in Q4 2018, some companies were barely able to meet expectations, while others set their expectations way lower for the future periods. Facebook, for instance, was unable to meet expectations for two times in a row, despite the profits hitting the record highs. Meanwhile, Apple met expectations, but iPhone sales went significantly lower in Q4. General Motors revenues were completely based on automobile prices, while sales plunging, too. Some of these issues are due to the Sino-US trade war, but even without it the market would have gone down anyway, if at some higher price levels. Every company has its limit, and once it’s reached, a correction is inevitable. On the other hand, every company makes progress through innovative ideas, and when it manages to create a new unique product or service, its price goes drastically up.

    Speaking of Facebook, Zuckerberg’s company multiplied its revenues more than threefold, from $4B in 2015, to $14B. Alphabet, the parent company of Google, succeeded in growing its revenues from $18B to $34B. Apple earnings are not growing as fast as Google’s, being very choppy, and it looks like the tech giant hit its iPhone sales limit. In 2015, Apple earned $58B, and had only 13% more by late 2018. The management finally opted for not disclosing the sales data, which had a very negative effect.

    These figures do not look that impressive at first sight, and one may even think they could be way bigger. On the other hand, however, just think of it: a single US-based company earnings are bigger than the entire GDP in Bulgaria, Luxemburg, or Croatia.

    Meanwhile, crude oil lost over 40% over the last three months. The stock indices, led by the S&P 500, followed in the same manner they had followed the rising crude price in 2017. This makes one think the indices will start rising as soon as crude finds support and bounces. Cheap crude is bad for exporters, while for other countries, it is a great tool, as producing nearly each and every product (or at least its packing or shipping) requires oil.

    Whether crude has already found its support, or it will continue falling, remains to be seen. Investors are now interested in the crude and indices, but not that much so as to make the things really optimistic and push the prices higher. A fall is quite possible anyway, and the currently open long positions are under considerable risk.

    When indices are going down, fear in the markets is so great that people sell even the stocks of the companies that are doing rather good. In order to provide the appropriate reasoning, the analysts usually remind the markets of a piece of negative news, even long-gone and forgotten. The stock then goes well bellow the oversold territory, just to give the investors a better opportunity to buy it later.

    One of such oversold companies, with the stock price going down with no particular reason, is Jonson & Jonson (NYSE: JNJ), which includes over 250 child companies throughout the world. Johnson & Johnson produces medicines, hygienic products, and medical equipment. It was founded in 1887 by three brothers: Robert, James, and Edward Johnson.

    Financially, the company is very much stable, and its earnings are rising steadily.

    The chart below shows the earnings always beat expectations in 2017, which allowed the stock price to hit the historical high.

    The price chart shows a very clear uptrend, with the price always being above the 200-day SMA, the latter acting as a support. In mid 2018, however, the stock lost as much as 20%, in a very short time frame. The earnings report was good, but the overall outlook was spoiled by the court decision, upon which J&J was fined at $4.70B.

    The complainants affirmed that the baby dust produced by J&J contained asbestos, which may cause ovarian cancer. The similar trials had already been held in 2007, when the company first had to pay $417M to the injured US citizen, but later the decision was revoked, as no proofs for the event of crime were found. At that time, the market barely reacted at that legal action, probably because the amount was not that high.

    It is quite high this time, though, so the news could not have gone unnoticed anyways. It was already priced into the stock in July 2018, however, as this is when the court took this decision. Ever since, the price went up again, and good earning reports pushed the price to the new all-time highs.

    The ascending trend could well have continued, had it not been for the indices. Those fell considerably, and Johnson&Johnson was unable to stand ground. In order to justify the fall, the company remembered the legal action, which only made this fall steeper.

    The situation was so grave that J&J had to announce it was going to buy the shares out for $5B, with the management considering the low price as an attractive investment opportunity.

    Meanwhile, a recently concluded research, that had been in progress for decades, showed that American women living in the rural areas suffer from ovary cancer more often than those living in cities, although it is in cities when you find asbestos far more often. This means the connection between asbestos and cancer, if it exists, is not obvious.

    Another research, however, highlighted that using amphibole asbestos led to the growing number of cases of occupational diseases. Amphibole asbestos is nowadays forbidden around the world.

    The information on this research came roughly at the same time as the court decision on J&J. Nobody wanted to consider it all in detail, and which kind of asbestos it was about.

    The whole story was so much overblown that each and every US citizen can now claim compensation from Johnson&Johnson. If this goes around the thousand of cities and towns J&J operates in, it could well lead to bankruptcy.

    How you want to act in this market situation, remains up to you. You’ve got the crazy tumult on the one hand, and the logic on the other. The logic says the scandal is pretty much overblown, and those who initiated it are sure to lose in the end. Who is going to win then? Those who will control their emotions and take a weighted decision on buying the underpriced stock. This is because, now, the stock is far more likely to rise than to fall, both according to the overall situation and the fact that the trials started as early as in summer 2018.

    Disclaimer

    Any predictions contained herein are based on the authors’ particular opinion. This analysis shall not be treated as trading advice. RoboMarkets shall not be held Company for the results of the trades arising from relying upon trading recommendations and reviews contained herein.

    Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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    4.6 stars on average, based on 26 rated postsHaving majored in both Social Psychology and Economics, I went on to continue my education in post graduate. Later I worked as a team lead of a tech and fundamental analysis lab in the Applied System Analysis Research Institute. This helped me to acquire all necessary skills and experience to become a successful trader and analyst, as well as a portfolio manager in an investment company. I'm a pro in the financial field and the author of articles for various international media. I also hold the position of Chief Analyst at RoboMarkets.




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    Analysis

    Apple vs Qualcomm: We’ve Got No Winner Here

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    By Dmitriy Gurkovskiy, Chief Analyst at RoboMarkets

    On Dec 10, it became known that the Intermediate People’s Court of Fuzhou acknowledged that Apple (NASDAQ: AAPL) violated two patents of Qualcomm (NASDAQ: QCOM), a chip manufacturer. The patents are regarding photo editing and managing apps with a touchscreen. The court’s decision was banning Apple from importing and selling iPhone 6S, 6S Plus, 7, 7 Plus, 8, 8 Plus, and iPhone X in China. This does not affect iPhones released in 2018, i.e. iPhone XS, XS Max, and XR, though. Curiously, the decision was taken on Nov 30, but the media covered it only on Dec 10.

    Over the trading week between Dec 3 and Dec 7, the Apple stock fell from $180 to $168, while as soon as the information became available to the public, the stock went slightly up. although having lost around 2% in the pre-market. Thus, earning by selling this bad news proved impossible.

    The stock, however, was unable to recover till $180, still falling now and being in the negative with the overall stock index drop. Did Qualcomm strike Apple so much that investors decided to abandon the stock?

    If it were the case, however, and Apple lost so much each time there was legal action against the company, we would not witness a steady uptrend around the last ten years. This is even not the first time Qualcomm files an action against Apple; besides, previously, Apple had to face multiple trials against Samsung, also regarding the patent rights. Currently, Apple is busy patenting everything it can, so that next time it may be the first to file an action.

    Meanwhile, despite the court’s decision coming into effect since early December, it is still de-facto ignored, with iPhones still being sold in Chinese stores.

    Qualcomm sent some proof to the court and is now demanding the iPhones may be no longer sold, while Apple affirms the decision covered just the previous iOS versions, while iOS12 does not violate any Qualcomm patents. Apple even updated their phone’s firmware last week in order to resolve this issue, but the court did not acknowledge it as a solution. Apple is of course going to appeal the court’s decision now while updating the firmware was more like an attempt to buy some more time.

    Qualcomm is sometimes considered as a mobile platform monopolist, and this is confirmed with some anti-monopoly authorities’ decisions in the EU, Taiwan, and South Korea. Qualcomm competition was not at all fair, as the company offered Apple good discounts in exchange for the tech giant’s not purchasing chips from other manufacturers.

    In Jan 2017, however, Apple filed an action against Qualcomm worth $1B in the US, as the latter did not return them the cash for those discounts.

    Now, it looks like Qualcomm is attempting to take revenge. Besides filing an action in Fuzhou, the chip manufacturer also filed a complaint to the Munich court, which also took Qualcomm’s side on Dec 20. This lead to banning iPhone 7&8 from selling in Germany as well.

    However, in order to drive the decision into effect, Qualcomm has to deposit EUR688M on escrow, while Apple still has the right to appeal. Qualcomm still has a potential to deteriorate Apple’s stats for the next few quarters. The Q4 report already confirmed that 1M less iPhones were sold than a quarter before, and this might be just the beginning. Once the report came out, the stock started making new lows, with the court decisions only adding to the negative side.

    This looks a bit like the Facebook story, when  investors pushed the stock down just because the number of new users started going down, even while the earning reports were fine, with the 2015 data leakage scandal adding the fuel to the fire.

    Qualcomm’s strike against Apple is very painful for the company. The tech giant might have just paid compensation, and this would have been the end. Now, it is becoming quite serious. If Apple is unable to demonstrate the higher than expected sales rise, which has been a common thing over the last time, this may mean the company’s fading out, and the investors will start trying to find a better option. For Qualcomm, on the other hand, this would not mean a 100% win. Over the last three years, the company’s earnings were going down. They had to pay high fines, and the investors are not very interested in buying their shares, with no uptrend emerging.

    Their most important rival, Intel (NASDAQ: INTC), has meanwhile beaten them in terms of earnings.

    Once Qualcomm stopped being able to demonstrate rising revenue, the stock started failing immediately. It reached its high at a bit above $80 in 2014 and has not been able to rise higher yet.

    It is currently trading in a tight channel without majorly going up or down, allowing short term traders to capitalize on random choppy moves, with over 30% profit.

    Meanwhile, Apple reached its technical top in September, trading at around $230. It tried to go even further in October, but failed, and then the price consolidated, pushed down to the nearest lows. The consolidation was most likely due to the investors expecting the Q4 report. Right before it came out, Apple formed a head and shoulders pattern, which might signal a reversal.

    The neckline of the pattern got broken out right at the report, with bad earnings and negative court decisions pushing the price lower.

    Where the absolute low lies, is still unknown. The 200-day SMA, however, may be a good reference option, as the price may well bounce off it. Still, with all major US indices going down, Apple price may sink lower, too, forming then a brand new support. This negative trend may only be stopped by a good earnings report with nice sales data.

    When it rains, it pours. With the overall indices fall, bad sales, and negative court decisions, Apple is very much under pressure. Note that the moment when the market crowd stops buying and starts selling in panic is usually very unexpected. Those who still believe in the US tech giant should have patience and wait. The markets may calm down after the holidays, and the stock may again prove to be a good long term investment vehicle.

    Disclaimer

    Any predictions contained herein are based on the authors’ particular opinion. This analysis shall not be treated as trading advice. RoboMarkets shall not be held Company for the results of the trades arising from relying upon trading recommendations and reviews contained herein.

    Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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    4.6 stars on average, based on 26 rated postsHaving majored in both Social Psychology and Economics, I went on to continue my education in post graduate. Later I worked as a team lead of a tech and fundamental analysis lab in the Applied System Analysis Research Institute. This helped me to acquire all necessary skills and experience to become a successful trader and analyst, as well as a portfolio manager in an investment company. I'm a pro in the financial field and the author of articles for various international media. I also hold the position of Chief Analyst at RoboMarkets.




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