Many of you are probably wondering what is going on with Apple. They come off a historic product release, products are flying off the shelves, customers are in lines that extend for blocks waiting to hand over gobs of cash, and the media is abuzz 24/7 over Apple’s sheer brilliance. Yet the stock is stuck in the mud. Then to add insult to injury, Oil tanks three consecutive days and the markets rally, finally the Bears Capitulate. Yet, Apple is left behind. What gives.

It’s called the Max Pain effect. Max Pain is a theory that 90% of all people that purchase options will hold those options until expiration, and rendered worthless. So, there is a formula that figures at what price point will the maximum number of people lose money if they held their options until expiration. The Max Pain effect is the tendency for a stock’s price to gravitate towards this number as we approach the options expiration date.

Check out the Max Pain links in the Sentiment section on the right side bar if you want to discover the Max Pain of another stock.

As you can see from the graphic below, the max pain point for AAPL July 2008 options expiration is $160. Now, options expire tomorrow (Friday, July 18) after the closing bell. The price of AAPL over the past few days has moved towards the Max Pain number. Now you may ask, why hasn’t GOOG, RIMM or BIDU experienced this same effect. Well, the answer is simple, their Max Pain points have all been above their trading price this week. So, they have been pulled higher, while AAPL has been pulled lower.

This is not to discount the unfortunate earnings report from Google, and the subsequent drop in price after hours tonight to 492.75 -40.69 (7.63%). Although Google had increased revenue by 35% over the same quarter last year, it missed on earnings by only a few cents reporting $4.63 a share, compared to analysts consensus of $4.74 a share. In a bear market, any kind of miss is not good. This combined with poor earnings from Microsoft and Merrill Lynch, helped push AAPL down in after hours to 168.00 -3.81 (-2.22%). By the way, the rest of the horsemen were down too.

Now, I know my next statement is going to sound masochistic, but here it goes anyways. This earnings bomb is a good thing, it’s precisely what we want to see, because now, we get to test the strength of the move upwards. Will it hold, or crumple like so many false rallies before?

Tomorrow (Friday June 18) will be a big day, because it will tell us if the recent move up is true capitulation or just a bunch of hot air. With these poor earnings and GOOG, along with the rest of the horsemen giving up some big points, the Nasdaq will likely gap-down tomorrow. This will be a test for the emotions as well, especially if you have skin in the game. If you’re playing it tight and safe, like many of us in the Wilderness Group, I suggest you keep it that way, at least until the market reveals itself.

UPDATE (Friday morning June 18 8:20 am): Futures are looking up, seems that last night’s earnings had little negative effect on this capitulation rally. I believe today is going to be a good day for Apple. I also believe the Gartner Group report on PC shipments portends another great quarter for our company, and that the lull in iPhone sales in the last 1/3 of this past quarter will have negligible affect. Also, Max Pain has been revised and raised to $165 this morning, relieving pressure, which should allow AAPL to rise into the close. Here’s the new graph.

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