Looking at a recent chart of Apple inc. or AAPL you can some interesting divergence patterns. Divergence on the weekly charts make high probability low risk trades.
Here is the chart with some colorful lines drawn on it for this post.
First the red line from April to September of 2012 where the stock price went from a peak of about 630 down to 530 and back up even higher to 690. at the same time the MACD-Histogram which is the black bar graph below went from a higher value in April to a lower local high value in September. This is what’s called a “Double top divergence” and signaled the down trend afterwards.
Now look at the green area where the stock price goes down in a fairly orderly manner with new local lows up until April 2013. At the same time the MACD-Histogram does not behave in a similar way, it actually goes up! this is a divergence, but no double bottom yet.
In the blue area, where the stock looks like it traces a ball bouncing off a floor at 390, the MACD-H goes from slightly negative to mainly being in the positive side in June and July.
This is a weaker signal but still it is a signal to the up side.
I entered a trade 10 days ago, it went like this:
Buy 4 AAPL mini call with 330 strike (deep in the money) and January 2015 expiration (lots of time) this cost me 92.50 per share and the stock was trading at 398.
Since mini options are for 10 stocks each, I paid $3700.
My plan is to wait for the stock to go up and the options will follow. When the stock goes up 10% and the options go up more than 30%, I will sell 3 contracts and take out my risk for the 4th contract – it will be like free money!
Then I will sell “covered calls” on this one contract to squeeze more money as I wait for it to go up even further.
An interesting situation will arise if the stock goes up and I may enter a put option or maybe several.
I promise to update!