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AAPL Rally Targets & Potential Inverse Head & Shoulder Bottom/Breakout

So we highlighted how in 2013 when AAPL was recovering off the bottom lows, before it went on to rally 144% in 2 years time, there were significant pullbacks along the way. Just like this pullback, on scale it looks very much like the pullback in 2013. We highlighted this as reference case-study to show the kind of volatility that AAPL could go through during the recovery phase and also to compare the very strong similarities of both the bottoming pattern and pullback of 2013 and how 2016 was nearly mirroring this behavior. Let's take an updated look.

In 2013 we saw AAPL pullback from -14% from peak to trough, bottoming out at a fibonacci retracement level of 61.8% → It then bottomed and went onto rally about another 89%. Fast-forward to the current trading behavior and we have a peak to trough range of $118.69 to a low of $104.08. What's more, that $104 level also squarely bottomed at the fibonoacci retracement value of 61.8%. And now we seem to be in a pretty convincing bottom off that $104 level. Take a look:

It's pretty obvious that today's trading action suggests that Apple's rebound has begun. In fact, the trading action all taken together makes this a very strong showing case how AAPL is following the behavioral path of it's past. Here off the lows we had the $2.00 reversal off of the $104 level on Monday. Then we had the $1.00 up day yesterday. But today's action pretty much affirms the bottom. Here's why. Apple got down to as low as the $104 level and is now back up to near $110 a share. And this all happened in three sessions. Now there is always the possibility that this rally could stall out at +7.5% like we saw back in August 2015, but those rebounds were the rare exception. In the overwhelming majority of the cases, when Apple rebounds like this off the lows, it means the rally has begun.

And 10% off of the $104 level would be $114.40 where as 12.5% would be $117.

So we're starting to now get a glimpse of Apple's direction and what is more likely to happen here.

Looking more at the near-term trajectory, AAPL is now getting fairly close to overbought territory on the hourly chart. Remember, it has now rebounded from $104 up to $110 a share. That's a $6.00 rebound from the lows. That is going to put Apple near overbought territory on the hourly. So a small pullback here would be expected. Now here is something that I've already started to sketch out ahead of time on the chart. I suspected we might see something like this. Apple has sold-off enough now that I think it warrants a larger bottoming pattern beyond just a v-recovery like we've seen countless times. I think now on the hourly, we're more likely to see some sort of inverted head & shoulders bottom like we saw near the lows back in June 2011.

Here's the hourly chart already sketched with the left shoulders & head in place, along with where we might forecast the right shoulder to later develop. The neck-line sits at about $112.

Here's how the inverted head & shoulders might play out. Again, I already suspected we would see something like this. So this isn't unexpected by any means. It was always one possible scenario and I believe that scenario is now increasingly more likely now

So the thought here is that Apple continues to move up to $111.50, stalls out after being relatively overbought and then pulls back again down to $108 level. After that, the stock runs back up to the neck-line and sets the stock up for a huge breakout. If it goes this path, it will lead to a massive rally. The measured move on this thing is $7.50 ($111.50 - $104.00 = $111.50 + $7.50 = $119.00). The upside target on an inverted head & shoulders like this would be $119 a share. And that is a reasonable result given that Apple's highs sit right around $118.50 a share. This scenario could play out between now and early to mid-January. I suspect that the head & shoulders pattern would completely no later than the end of November and Apple could begin rallying by early December. That would put it on a trajectory back to the highs by the time Apple leads into earnings. That's one scenario.

The other scenario here is that Apple just continues to rally. We've seen multiple cases -- in fact the most common case -- is the stock just rallies for a few weeks and stalls out somewhere in the 11-13% neighborhood. That would put Apple on a straight course up to $115 to $117 a share over the next 10 sessions. Normally, the entire rally from tough to peak is 10-15 sessions and 11-13%.

Here is the 30-RSI table with the past two sessions included. We're assuming at this point that the rally has begun given that Apple is already up 5.77% off of its lows. Apple spent 7-sessions trading lower after hitting a 30-RSI and lost roughly 4.04% after hitting a 30-RSI. So far very consistent with the historical trend:

The last four smaller 30-RSI rallies went for 11.68%, 11.53%, 12.56% and 11.0% respectively. At 11%, Apple gets up to $115.53 before either pulling back and beginning a new separate rally or simply topping out. At 12.56%, we're talking a top near $117.15. At 11.5% the high sits near $116. That's the typical 30-RSI rebound that we've seen going back to January 2014 -- that's nearly 3-years now. Each of the rallies lasted 12-days, 8-days, 10-days and 17-days respectively. So you can see the shortest rally lasted just under 2-weeks while the longest lasted just passed three weeks. The average is somewhere around 12-sesions. But notice that the June rally simply just lead to a sharp pull-back before Apple continued on a much much larger rally. So I wouldn't necessarily count that as a mere 11% rally. Because after the stock pulled back for 4-sessions, it then rallied 20%+. The rally before that was the post-April earnings rally sparked by Berkshire and went for 12.56%. The one before that was the sell-off we saw going into July earnings which Apple then fully recovered before it actually reported its results. I remember that correction. Apple fell from $130 down to $119, hit a 30-RSI and then rallied back to $130 before it report its numbers. Before that was the January 2014 earnings report which lead to a sharp sell-off that Apple then recovered in 12-staright sessions of rallying.

Now I think given the risks that we've seen and the fact that the market brought Apple down to $104 does merit some caution moving forward. Remember, we want to see AAPL trading COMFORTABLY above the $110 mark for us to feel confident about our March 100/110 call spread. We'll have to assess if we should sell our March 100/110 call spread or hold. Way may all together trade around it and by that I mean sell higher and buy back lower. If AAPL is at $115 by early December then the March spread will have a value of about $7.50 to $8. Seeing as how we purchased this @ $5 that's a pretty nice return. At that point, it might make sense to sell the position and wait for a better setup as AAPL comes back down to retest the lows. What we're pretty confident about is that AAPL will most likely not be breaking the $118 level until after January earnings. And even though there is a high probability that AAPL will be trading well north of $110 (max value of our spread) by March expiration, we still need to mitigate the risk that it could that AAPL could still struggle and be range bound even by this time frame. So we're going to be watching that $115 level closely.

To recap our original analysis on why AAPL would bounce here review here:

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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