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[Members Update] Heading Into AAPL Earnings Tomorrow & Our Stock Replacement Strategy


We are all set for Apple earnings scheduled for this Tuesday, October 25 after the bell. It's been a while since we held a fully loaded 20% allocation into earnings; with AAPL trading more than $20 above our momentum sell point of $96 it provides a margin of safety to justify the risk. The technical picture on AAPL couldn't be any stronger as we head into earnings. We have 2 back to back symmetrical triangles that have formed on AAPL. These formations tend to have a bullish bias as they are continuation patterns of the prior trend. We have a text book target here of $121.50.


It's important to note that these formations can also break to the downside, although statistically less likely it does certainly happen. The breakdown target is the $112-$113 area.

With regards to the macro trend, even if AAPL dropped $4 to $6 on earnings, that would mean absolutely nothing to our long term trend forecast for this stock. The path of least resistance is still very much to the upside. A pullback on AAPL would be a massive by-the-dip-coupon by the bull community, as it would be a buying opportunity. We're playing the big picture trend recovery that AAPL is going through here and we will easily 3x-5x our % gains over the course of a year on our AAPL allocation.

It's important to keep perspective and not get caught up in the drama of pullbacks. In fact, at some point we DO want to see a correction in AAPL so that we can matriculate our stock replacement strategy. We may get that opportunity this earnings round or sometime after the next rally. Say AAPL breaks to the upside on this report and goes on the next leg higher to retest it's former highs, we would expect resistance around the $130-133 area, and then a pullback from there. Or we may get an all together pullback on the report that brings the stock to the $113 area. Either way, we'll be stalking AAPL for the next correction on a "relative basis." For example, a rally to the $133 and then a pullback to the $120 area is the same buying opportunity as if AAPL were to pullback from here to the $112 area. So the numbers are not what matter but the actual relative pullback is where we'll be looking to initiate our stock replacement strategy.

Instead of trying to predict every move, our time is best used in modeling trade setups that can sufficiently take advantage of the distortion in options premiums that transpire on AAPL pullbacks. So instead of the November 110/120 Call spread we may consider another spread that has a similar profile of risk & reward that is commensurate with where AAPL is trading and expected to go from now till November 17. We may also layer a more aggressive booster on top of our stock replacement strategy. It all just depends on the depth of the pullback that we may get: a moderate pull back vs an extreme over reaction where there is massive capitulation, warrant different spread opportunities.

Finally, we really do need to consider the different elements of the earnings equation here and the likelihood that Apple will rally on earnings. Remember, there's an extra week in fiscal Q1 than there were in 2015 and 2016. That alone should drive sales to record highs. And if Apple does deliver record sales, then chances are we get guidance above the Wall Street consensus. Secondly, Apple did reiterate guidance for us just as the quarter was drawing to a close. You're not going to reiterate guidance unless you're confident that you've hit your numbers comfortably. So chances are that suggests to us that Apple will probably report at the high end of its guidance range. Third, Apple is in a recovery right now. It's no longer in a bear market. That bear market ended when Apple crossed $95, $100, and further reinforced when it crossed $110 a share. Apple formed a double-bottom and the breakout point was $110 a share. Apple hasn't traded below $110 in quite a while now (well over a month). The stock has rebounded over 30% off of its lows. It's clearly in a recovery. The point here is this. That when you're in a recovery, even when earnings don't go well, the sell-offs are shallower and less permanent. We do get sell-offs in bull markets, but in most cases, those sell-offs are shallow, short-livd and recovered.

For example, if Apple were to close at $118 tomorrow and then sell-off $5.00 on earnings down to $113, chances are we would see a recovery of those losses and we would probably still see a test of the $120 level at some point between now and January earnings.

The fundamentals on AAPL are mirroring the technicals & vice-versa.


Further adding to the bull case: According to research from Piper Jaffray, iPhone 7 Plus is 86% out of stock in the U.S. and 88% out of stock in China. iStockNow shows all Apple stores to be sold out of 7 Plus models by mid-morning on a daily basis. If consumers want to order an iPhone 7 Plus jet black version in time for Christmas they'll need to hurry because ship times just extended into December. Apple's strong momentum combined with Samsung's collapse should be a central theme of this Q3 conference call, even if it doesn't yet manifest in current numbers. iPhone 7 sales only account for 2 weeks of Q3 and undelivered pre-orders don't contribute to earnings. Nevertheless, sentiment should be extremely positive for the future. Analytics firm App Annie revealed September App Store sales in China topped the United States for the first time (by 15%) at revenue of $1.7 billion. China is an x-factor for this stock. If Tim Cook surprises the market by saying anything positive about China it will jumpstart a significant Q4 rally in AAPL. With both Piper Jaffray and App Annie sharing good Chinese data it raises the probability of a significant rally underway. Even without China, we like the stock because of a return to growth in iPad/Mac/iPhone for Q4. With China, we could see new high's by Thanksgiving. Again, our forecast is modeling for new highs by early to mid next year. But on the extreme bullish side of things, it's all together possible that AAPL could make that leap quicker than many would expect.

Until then, we'll trade what's in front of us. Another consideration that is on the table is that we may all together be exiting our March 100/110 call spread if AAPL spikes significantly higher. Right now that spread is trading @ $7.50. If the spread gets to a value of $9 to $9.50 anytime this week, then we will most certainly sell that spread. Why? Because at a value of $9 there is only 10% upside left in how much farther that spread can appreciate. We would be better off selling at $9 and waiting for a better entry on a new spread with more upside potential. We will update Members as things unfold.

Some of the greatest pearls shared by Jesse Livermore:

“Money is made by sitting, not trading.”

“The desire for constant action irrespective of underlying conditions is responsible for many losses in Wall Street even among the professionals, who feel that they must take home some money everyday, as though they were working for regular wages.”

“Buy right, sit tight.”

“Nobody can catch all the fluctuations.”

“There is a time for all things, but I didn’t know it. And that is precisely what beats so many men in Wall Street who are very far from being in the main sucker class. There is the plain fool, who does the wrong thing at all times everywhere, but there is the Wall Street fool, who thinks he must trade all the time. Not many can always have adequate reasons for buying and selling stocks daily – or sufficient knowledge to make his play an intelligent play.”

“It takes time to make money.”

“Don’t give me timing, give me time.”

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