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Finding the Next Apple


These companies' stories can help give traders an edge.

Innovation. We hear it all the time. Companies must innovate or die, the saying goes. But as traders who take our cues from the charts, how important are the stories behind the companies? How should traders engage in researching a fundamental story yet buy on the technical merits?

It's my belief that all information will eventually be priced into a chart, so buying after a recent consolidation where risk can be enumerated is a solid practice. That being said, ignoring the bigger picture and product innovation cycles of companies wouldn't be a wise decision. Companies have to sell a good or service to stay solvent, and "aha" products that improve an existing product can be life changing for a company.

I will highlight a company that made it, two that looked poised to prosper, and one that might have seen its better days. In all cases, technical reads would have gotten you in or out in plenty of time.

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Check out the chart of Apple (AAPL), a monster winner for almost a decade now. While the chart tells the story, the products drive the revenue. Unless you've been sleeping in a cave with dial-up service the past 10 years, an Apple product is somewhere in your life. You've either downloaded iTunes, complained about your child texting too much on their iPhone, or asked your husband what that terrible racket coming from his iPod is. The story of Apple's "almost demise" and its subsequent rise from the ashes is legendary on Wall Street as well as Main Street. For the patient investor, the multi-year base from 2000 on would have been very rewarding once Apple became a household name.

For the trader, there have been many opportunities to game this stock and mint your own money. By keeping in touch with the innovative products a company releases, coupled with astute chart reading, a trader can be well positioned when a company is ready for a momentum run. As a trader can see from the Apple chart, products are only one part of the equation to trading successfully. Proper entries and risk management will make any trade in Apple that much more successful.

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For those old enough to remember 20 years ago, Kodak film was the gold standard for any instamatic camera. Buying 110 film was a rite of passage before going on vacation to any national park with the parents. And then the next big question was 12, 24, or 36 pictures per roll? If these memories leave you scratching your head, it would be because digital photography virtually wiped out the need for Eastman Kodak's (EK) primary product 10 years ago. Understanding that its very existence depended on re-invigorating its product line, Eastman Kodak has taken up the task with fervor and success. Digital products are now the mainstay of its product line, and traders are beginning to bid up the shares in this turnaround story.

With a move above its 50 MA on the weekly and a solid basing formation coming to fruition, Eastman Kodak is poised to march higher. Traders can look to go long in the $6.00 area with a stop below the recent consolidation.

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A third company maybe poised for turnaround success is Lexmark (LXK). Based in Lexington, Kentucky, Lexmark has suffered for years under the load of a market saturated with cheap printers and high ink costs. Lexmark finally abandoned the low-end market and focused on its core competency in drugstores and big-box hardware stores. Along the way, Lexmark was able to bring a printer to market with a $0.01 per page ink cost, thereby putting itself at the front of a crowded field.

For whatever reason, traders have seen a need to bid up Lexmark in the last year. As the chart above dictates, Lexmark will be entering resistance around $37 and change. If Lexmark is able to pause here and then continue higher, a good risk/reward entry may be had in this area.

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And what would any great turnaround story be without highlighting a company that has failed to change with the times? Blockbuster (BBI) stores can still be found in many strip malls, but their aisles are not even close to being as full as they were 10 years ago. Many changes in the movie rental industry can be attributed to Blockbuster's demise, but the biggest one came in the form of competition from Netflix (NFLX). With no late fees and delivery to your door service, Netflix took the bull by the horns and virtually ran Blockbuster out of town. Not one to rest on its laurels, Netflix is currently highlighting its view-on-demand movie service.

And where was Blockbuster in all of this? Simple answer: out to lunch and one step behind. As Blockbuster's issues spiraled downward, so did its stock price. Traders and investors alike have bailed out of Blockbuster en masse over the years, and Blockbuster now finds itself firmly entrenched in penny-stock status. Unless Blockbuster pulls something radical in the future, expect this company to go the way of the horse-drawn carriage as a primary mode of getting the entertainment fix.

As traders we often take our cues from the charts, pulling out to weeklies and drilling down to five-minute charts all in an attempt to find the perfect entry. Stepping back periodically and assessing the landscape from which a company competes can add an edge to your trading arsenal. If you're aware of a new product that makes you say "Why didn't I think of that?" and you subsequently find yourself using that product, then you might be onto the next big thing. Granted, products need to end up with mass appeal and have staying power on top of initially grabbing your attention. Keeping your ear to the curb along with a chart-based read can go along way in helping traders find the next Apple.

For more from Quint Tatro including specific trades and access to his portfolio take a FREE 14 day trial to Minyanville's FlexFolio by Quint Tatro. Receive email alerts with every trade, interactive strategy sessions and much more. FlexFolio is beating S&P 500 by 25% since inception. Learn more.
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