Apple: Still Rotten

APPLE: Still Rotten

About a month ago I wrote an article on Apple for Green Faucet: “APPLE, Something is Rotten”. Since that time the stock has had huge swings and tons of news, including the heartbreaking loss of the beyond extraordinary Steve Jobs.

I illustrated in that article that based on a combination of technical and fundamental factors, a decline was coming in AAPL stock. With the stock at 403, I said, “I'm betting we'll see that $365 level in AAPL soon”.

AAPL did fall quickly below 360. However, it soon rocketed upward on news of fantastic pre-orders for the new version of the iPhone. After a few days of trading at record levels, AAPL fell sharply as its revenue numbers missed the mark. Reality had hit that Apple’s strategy of quickly bringing out upgrades to the iPhone was now causing some self-cannibalization. Also, the huge competition in tablets, especially Amazon’s new entries into the space, was going to affect margins.

All of these swings in the stock have created a pattern in the charts that are very noteworthy. Please look at the daily chart below of AAPL.

 

Chart courtesy of TD Ameritrade

The most important aspect of this chart occurred last week. AAPL roared to a new high on iPhone sales, leaving an upside gap. After three days trading near those levels, the earnings news came, bringing a downward gap. What formed was a very rare island top. You can see that this happened at a similar level as the previous top earlier in the month, forming a double top.

This action essentially says that investors want out of this stock near the 420 level. And that’s in the face of many analysts with targets in the 500s.

I have marked off the support and resistance zones with the grey boxes. AAPL should have a very tough time getting into the resistance between 407 and 415. Support is way down near 370, which based on the 200-day moving average and very solid valuations, should be very good support.

I am very bullish on the stock market as a whole. However, AAPL will certainly affect the relationship between the NASDAQ and the S&P 500. AAPL has a 12% weighting on the NASDAQ. So for that index, it’s like an 88 lb person dragging around a 12 lb log all day. For sophisticated traders that partake in pairs-trading strategies between the NAS and the S&P, over time, the action in AAPL should bring negative relative performance for the NASDAQ.  

For traders and investors, in that area just below the island top, 407-415, I would be selling AAPL, expecting that the stock will be in a 370-415 range for quite some time.

Full Disclosure: I have a butterfly option strategy that has a negative bias in AAPL stock.

 

 

AAPL trading range AAPL spent a lot of time building a base in the mid 300s, so it should come as no surprise that it will need to do the same around 400 before sustaining another move higher. This suits my strategy perfectly: sell covered calls in the 400 area, then if the stock is called away, sell puts in order to get it back. If the puts are assigned I will own the stock again and sell more covered calls. Submitted by Bill P (not verified) on Wed, 2011/10/26 - 4:10pm » reply |