top of page

Members Update - AAPL Bull & Bear Case Made

So we are back to very heavy selling today, but like we saw yesterday, the RSI loss is significant which puts us in a good position. It means Apple hits oversold levels at a significantly higher stock price than it otherwise would if the loss were less severe. The RSI loss is currently at 3.07 which is significantly higher than it was during the first leg down. That's a big deal. It really is. Normally, you get a slowdown in the RSI loss. Now we're getting an acceleration of the losses. What that means is we're losing more RSI per $0.01 in stock losses. This means Apple hits a 30-RSI quicker this time around than it did last time. Right now, down here at $108.20, Apple is already at a 33.44-RSI. Another dollar in stock losses, Apple is right back down to that 30-level. At the current pace of RSI losses, Apple would need to fall to $103.72 to hit a 20-RSI. That's a good 10-points higher than at any time we saw Apple hit a 20-RSI in the bear market era last year. And remember, two things have been true about Apple hitting a 20-RSI. First, that the losses below a 20-RSI are very minimal. We normally see more a percent or two of drawdown after Apple hits a 20-RSI. Second, that Apple normally rebounds 20% from its absolute bottom. So suppose Apple gets down to $100 a share -- which is roughly $4.00 below where it would hit a 20-RSI if the losses continued and the RSI continued to drop at the current pace -- Apple would be due for a 20% rally from $100 a share. We had three instances of Apple hitting a 20-RSI between 2015 and 2016 and three instances of Apple rallying MORE THAN 20% each time. It was something like 23%, 27% and 33.6%.

And remember this is all irrespective of fundamentals or news or anything that people might think will keep Apple down. Apple had a very bearish environment last year and rallied 20%+ each time regardless. It has nothing to do with fundamentals and everything to do with technicals. The market is cyclical by nature. It undergoes a period of selling and bearishness and then will undergo a period of bullish momentum. Look at the SPY this entire week after hitting 30-RSI last week.

So to conclude, Apple is back at its lows and sitting at a 33.63-RSI with an RSI loss of 3.07-RSI per dollar in downside. A drop to $106.97 puts Apple at a 30-RSI. A drop to $103.72 puts Apple at a 20-RSI. Notice that after the rebound up to $111.50, Apple will be back to its RSI lows of last week after a mere $1.20 of further downside. Meaning, Apple will make incremental new lows of -$1.20 to -$1.50 and be at the SAME EXACT RSI it was at during its previous lows lat week. That's horrible for the bears. Just need the RSI loss to continue at this current pace and all is well.

And here's another thing. Once Apple hits a 30-RSI this time around, the probability that this leg lower is the bottom is very high. Because normally you get maybe 1 or 2 consecutive 30-RSI events without a rally. Meaning, sometimes you will see Apple push down to a 30-RSI, rebound for a few points and then continue lower. That continuation usually marks the last leg lower. So if Apple gets down to $107 by tomorrow and hits a 30-RSI again, chances are whatever the low happens to be in this leg will be it. Chances are Apple then rallies hard from there.

At this point, it's better to get it over with and puke another gasp lower. We want this happen sooner than later. We really don't want to see Apple have a solitary green day at any point in time between now and hitting 20. I would rather Apple just hit a 20-RSI in the next 2-3 days with straight selling. It would do a number of things for us.

First, it would put Apple right near its likely lows. Second, it would then kick-off either the rally or the long period of low volatility consolidation where Apple rallies and loses a few points every few days while remaining range-bound. If we go right into rally mode, you can expect Apple to rally at least 15-20%. I mean at a minimum, you could count on a 15% rally over a period of several weeks. From $103 a share, a 15% rally puts Apple at $118.50. Think about that. A rally that would be smaller than any previous 20-RSI rally, would put Apple right back at its highs. A 20% rally would put Apple well north of $120.

Now if we compare the current situation to what happened in December - January of last year, it would be the same as Apple getting down to the low $100's. The low $100's is a perfect comparison to what we saw last year. Think of $100 as being the same as $92. Why? Because when you look at where Apple has become oversold here in this correction, it's significantly higher than where it became oversold back then. Back then, Apple hit oversold conditions when it reached $103 a share. We hit oversold conditions here for the first time at $108.30. What's more -- and this is important -- the RSI loss back then was down to under single digits in some sessions. It was hanging round the 1-point range. We're seeing RSI loss three times that here. Meaning, we're more likely to hit a 20-RSI much faster than Apple did back then.

Take a look at this chart below which compares the worst leg of the 2015-2016 crash to today. As you can see from the chart below, the November-January 2016 correction is coded in blue. The first then you should notice is that Apple hit a 30-RSI back then at $013.80. $103.80!!!!!!! That is $5.00 lower than where we hit a 30-RSI today. Then Apple rebounded a few days up to $107 a share and the had to fall $13 straight down to get to a 20-RSI. That is a significant amount of selling that was required to get Apple down to that 20-level. Apple hit a 22-RSI (not even 20) at $94.00 a share. After that, Apple traded sideways for exactly 5-weeks and then went on a 35-session (7-week) rally that went for 22.55% from low to high. In total, if we compare that to today, it would be the same as Apple hitting a 20-RSI somewhere around $103 a share by next Wednesday-Thursday, falling to a low of $98-$99 sometime over the five-week period and the rallying for 7-weeks back up to the highs. That would be the rough equivalent of Apple finally finishing its consolidation period on Christmas week. If we consolidated for 5-weeks after hitting a 20-RSI next Friday, the consolidation would end on December 23. Then if it took us 7-weeks to get back to the highs like last time, we would peak out somewhere around February 10th.

Now the reason I'm pointing all of this out is because I don't want people to get nervous about this sell-off. It really is happening a perfect time for us. Really it is. There is always the risk of a correction and we would rather take a correction that happens early on in a cycle than having to worry about one happening mid-cycle. Like the fact hat Apple is undergoing that correction now takes the risk and worry off the table of it happening sometime in the middle of the cycle. It's great that Apple is sitting here at a 30-RSI in early November rather than sitting at 30-RSI in January or February. And what I'm showing here is that EVEN IF Apple underwent what was the worst part of its 2015-2016 bear market, Apple would bottoming out at much higher prices -- like $98-$103 -- and it would begin rallying no later than Christmas. That's if it was the worst case scenario. But let's say its even worse than that. Even if it is worse than that and it takes longer, remember that we're sitting in March & November spreads. We could afford Apple to undergo a 7-week period of consolidation and a 10-week rally. Even with that, we would still have 1 month until expiration. March expiration is 22 weeks away!

So even if we saw that, we would be fine. Not just fine, we would be very profitable. Remember, that if Apple does hit a 20-RSI at around $103 share and the proceeds to go on its 20% rally, that put the stock at $124 a share. If it bottoms out at $100 and does that, you're still talking about $120. And here's the thing. You have to know that if Apple gets back up to $120 after testing $100 yet again, the probability of a breakout skyrockets. And since we're talking about a situation where in the worst case we're sitting at $120 with 1 month until expiration, chances are we get that breakout to happen for us.

What's more, Apple historically has not just stopped at a 20% rally. All of the post 2015-2016 rallies went for well over 20%. One went for 27.05%, one went for 22.55% and the other went for 30%+. So if you applied any of those to the current situation, it puts Apple above $120 by February. And that's if Apple goes through that b.s. consolidation period. That's assuming Apple doesn't just bottom right here and now at a 30-RSI and start to go on a tear. That assumes Apple doesn't bottom exactly when it hits a 20-RSI and then goes on a multi-week rally. If any of those scenarios happen, Apple is at $120 by Christmas.

Now on a separate note, Apple' multi-year chart is setting up an ultra ultra bullish gargantuan double-bottom and w-recovery set-up with an inverted head & shoulders undertone. The pattern is ultra bullish. Take a look below.

One can easily make the argument that Apple has formed a $30-wide double-bottom. That we have our bottom points at $90-$92 a share in that area. Then we have shoulders forming at the $105 level. The neck-line is $120 we can call it. That is $120-$90 = $30. On breakout, there's a measured move up to $150 a share. There are other technicians out there who have independently arrived at $150 a share for different reasons. The point is that the chart is suggested that over the long-term, we could see a move up to $150 if Apple break through $120 a share.

The chart looks very bullish. And this is something that has evolved over the course of 18-months. Of course, Apple would need to bottom at a price now lower than $100 for this to remain in tact. But it is certainly there.

The bearish side to this development, and this is something we're taking very seriously, is that the monthly chart DOES show a significant topping candle formation on the monthly chart. We have prominent shooting star or inverted bearish hammer that formed on the monthly chart. This nearly the same candle formation that marked the top in 2012 and 2015. These formations tend to put bearish pressure on the stock as it shows sellers were significantly more aggressive than buyers. Right now the bull case is still stronger and outweighing any formal sell signal. But we need to acknowledge the development.

So why aren't we in a sell signal - because we still have bullish crossover on the monthly time frame that acts as a tailwind to the stock. When we last got those shooting-star candles on the monthly, we were also coming off an extremely extended month-to-month long rallies and we were experiencing bearish crossovers on Stochastics, MACD, & MACD histogram was stair-stepping lower. We don't have that here right now. Instead we have AAPL coming out of a massive bearish cycle, a recovery bottom with bullish crossovers on the monthly time frames. See below:

Again, we will address this as it develops. Right now, we're still historically assured a recovery rally and it's then when we'll begin to assess the quality of that rally and render a more complete picture.

And now here is another thing to think about. I read Trump's agenda very closely last night and his 10% tax on repatriation is on-going. It's not a 1-time thing. This is a 10% rate period. And that is a big deal. That's a huge positive. Because Apple still makes tons of money off shore at a lower tax rate with Apple International and can now bring that capital over to the U.S. Especially if Trump is able to get congress to cut the corporate tax rate to 15%. It may be cheaper for Apple just to headquarter Apple international here. The point is that with a 10% on-going tax, it gives Apple a tremendous amount of flexibility on how and when to repatriate.

Now the other thing to think about is this. During the worst of the bearish sentiment we saw last year, Apple tested and failed to break under $90 a share on three separate occasions. Three different times it tried and failed. The bears could not push Apple under those levels in a very bearish environment for Apple fundamentally even. But as we approach the launch of the iPhone 8 -- which everyone is calling the mother of all iPhones -- the fundamental pictures only improves from here. What's more, Apple is constantly retiring shares and increasing its cash holdings. This means that Apple's valuation drops at $92 a share to lower level than it was last year. This should put a huge floor under the stock even at the $100 level. Because if you're a bear, you have to wonder how much downside could there be. In the worst environment, the bears couldn't take it under $90. So you have to figure there is probably a lot of buying interest between $90 and $105 a share. Especially as we get closer and closer to the iPhone 8 launch next year.

So all of these things are pointing in Apple's favor right now. The biggest right now for us is the fact that Apple hit a 30-RSI at $108.46 a share. If you look at this table below, you will see that this is the highest level we've seen in over a year. In August 2015, Appel did hit a 30-RSI near $115.98 for the first time but it also rebounded 7.5% in two different occasions over the period of like 8-days. What's more, that entire correction lasted only like 2-3 weeks period. Apple hit its lows and recovered all the way back to its highs in a very very short period of time. That was an unusual period because Apple was losing like $5 a day on very little RSI loss and collapsed on that August flash crash before fulling recovering its losses in just a matter of a few weeks. But if you look at the organized selling which looks a lot like today, you can see that Apple hit a 30-RSI at $103.80 during that December sell-off, at $97.80 during the post-April earnings sell-off and at $91.01 on Brexit. Here we're at a 30-RSI at $108.46.

Here is the 30-RSI table updated with the current correction. Notice that Apple hit a 30-RSI 5-sessions ago now. It's now already on the outlier side of the events. In most cases, we see a bottom within 1-2 days. If you go back to the 2015 correction, it was 14-days in August 2015, 34-days in December - February of last year, 12-days after Apple reported its fiscal Q2 earnings becoming oversold the next day and finally 1-day after Brexit. Today also does represent the second day Apple fell to a sub-30 RSI which increases the likelihood that Apple bottoms at some point in this leg and before rebounding again.


Lastly, I want to remind everyone that where AAPL is trading today, is not where is will trade in the future. How the sentiment today feels...all of this is inconsequential and not where AAPL will trade months from now. It never is in fact. Every instance of bearish periods are nearly always reversed eventually. We see this time & time again. So this really is the plunge action we wanted earlier in the week. As you can see these take time to develop and it's why we hedged our trade by going on a longer dated spread with the 2018 January Spread. The 2018 January spread loses less value then the November when you get this kind of action. But rest assured you can bet that AAPL being well above $120 is nearly a sure thing a year from now. AAPL at $120 a year from now is actually a bearish outcome that we contingently modeled for in the worst case type scenario. The March spread is only asking AAPL to be above $110 twenty-two weeks from now. So we have plenty of time to weather all of this.

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.”

bottom of page