So as we've been saying for a while now, the markets are all setting up for a much larger rally on the horizon. As we posted back on Sept 21 that the market was cultivating a retest of a much larger bullish pattern getting ready to go onto the next wave higher. https://www.thestreet.com/story/13750357/3/multi-year-bull-market-on-the-horizon-says-bottrigger.html
We now have a successful retest of a major double bottom W formation on the $SPY. What's especially convincing about this breakout is the large sample of data we have here. This is not a double bottom on a daily time frame of a few weeks, but rather a double bottom breakout occurring over the course of 1.6 years worth of data.
I can't stress enough how strong this breakout is. You don't just come this far to simply turn around. What this shows us is that you have massive global participation in the US Market. Although there will be the general fan fare of pullbacks and shenanigans along the way, it's still a a market where the benefit of the doubt goes unequivocally to the buyers. Every pullback that we've experienced, no matter how gut wrenching & nasty has thus far been a buying opportunity. Even a breakdown on this primary term uptrend would not yet yield enough evidence to suggest the primary term trend is over. We would need to see a breakdown of the primary term trend and then a retest of that breakdown that ultimately fails for us to get serious about an official sell signal. What BotTrigger is especially effective at seeing is when the air is really coming out of the rally when you have a breakdown of price action & an alignment of momentum oscillators that are all confirming the breakdown with decreased value from their prior value inputs. On the primary term macro inputs we're keeping an eye on a whole consortium of indicators that help us navigate the larger picture. Right now we do have decreased MACD histogram values but that is not being confirmed by the most important indicator of them all which is PRICE ACTION & PATTERN CULTIVATION. Take a look at the quarterly view on what usually occurs before a major crash.
So although we do have concern regarding some of the most important momentum oscillators, this is largely negated due to Price Action and Pattern Cultivation leading the charge. Until we have a confirmation across the board the benefit of the doubt is still in the buyers favor and we will play it as such.
Moving onto AAPL's surge today to $111.73, we're getting some very impressive action. We had outlined why we can expect this pullback to be short lived in our earlier post here. We had outlined the potential for an inverse head & shoulder breakout to be cultivating on the near term trend and that is still very much on the table. We have essentially hit the neck-line of that formation. Again the shoulder of that set-up is down near the $108 level.
Lets take a look at the Nov 16 chart we posted and compare it today's updated view:
So far we're following the path in the model that we've laid out, and it's reasonable to expect a pullback back down near the $108-$109 area. If we indeed get that pullback and then authoritatively bounce off that level...then it will setup what will look like a very convincing higher-low off that level. Remember the head formation pulled us back down to the $104 level. So a bounce off the $108-$109 level would look extremely bullish and pave the way for a breakout of the $112 area. Inverse head & shoulders are statistically very strong reversal patterns.
Also, keep in mind that apple has now rebounded 7.35% from its lows of $104.08. If we count the high of the day today we've rebounded a full 7.59% Again, going back to our analysis on how AAPL performs post reaching a 30-RSI event, the shortest rebound we have ever seen in AAPL's history has been a 7.5% rebounds we saw back in August 2015. So we've pretty much hit that post rally mark. If we topped out here, this would be in line with our analysis on a historical precedent.
So this would still be the shortest post 30-RSI rebound in history if Apple were to top out at $111.73 before going oversold again. The more common rebound we have seen is an 11% rebound off the lows after hitting a 30-RSI oversold reading. An 11% rebound is $115.53 which is the typical rebound. Here is the updated table on what happens when AAPL hits a 30-RSI oversold event:
Again the point here is, given the neckline around this $112 level, it's all together possible that this 7.5% rally may be the extent of where we end up booking the rally gain on the table. But that does not mean that's where the overall rally stops.
With today's action, we're now fairly certain that Apple has bottomed out. That even if Apple were to see a near-term top, it will either form an inverted head & shoulders or a double-bottom. But this is no longer the same sort of sell-off we see that leads Apple to fall to a 20-RSI. The 14-day chart now looks very bullish -- a lot different than the recovery back in August when AAPL topped out around $132-$134 -- and it is trading above a 50-RSI on the daily. The hourly has pushed up to the 70-level. Thus, at worst, I think we get an inverted head & shoulders or a double-bottom. We don't think it's likely that we see any trading below $100 nor do we think we'll ever see a 20-RSI on the daily chart during this downturn.
What makes this situation fundamentally different than the August situation is the retracement is much larger here. You see, back in August, Apple fell from a peak of $132 down to a low of $107 before rebounding 7.5%. That was a different situation because Apple had undergone a much larger correction. So 7.5% was not as significant of a recovery as is 7.5% here. Back in August, the recovery retraced just about a third of the losses whereas here Apple has retraced more than half of the losses. And the daily chart looks aggressively bullish. The candlesticks are pretty bullish. If Apple closes at these levels, then I think we're in great shape. We're either going to see Apple breakout above the $112 level and make a move back up to $113+ leading to an 80-RSI on the hourly chart; or we'll see a near-term top of some kind which leads to a pull-back and inverted head & shoulders set-up.
The point is that the post-earnings pull-back we've seen out of Apple is now looking very much like a normal typical correction that bottoms out at a 30-RSI. The rebound off the lows has now gone on for 7.6% over the first 7-sessions of the rally. That's another thing that suggests this bottom is for real. The rally has gone on for six sessions now without any sign of Apple topping out or preparing to pull-back toward the lows. The point is that we're now far along in the rebound process. The shortest rebounds we've seen on record recently were 8 days once in July 2015 and 9-days in May 2012. In both cases, Apple rallied 11.36% and 11.53% which is well within the norm for a rebound. The 11% mark for this rally would be at around the $115-level. And I think that is precisely where we might consider to sell our March 100/110 Call spread. Although we strongly believe that AAPL will be trading far above $110 by March 2017, we want to remove any stress that the stock may languish. That position stands to make 100% so long as AAPL is at $110 by March expiration. (Since we got filled @ $5, our breakeven is $105). But if we can sell @ $8 there is still a very strong chance that we may be able to reenter into that spread at a lower price from now until January earnings. In other words, we need to thwart the very real possibility that AAPL may not see a new high this quarter past the $118 level. So we might consider selling that position and look to reenter at a lower cost basis or all together roll that position out into a new call spread that expires farther out in July or look @ the March 95/105 call spread on a pullback. For example, let's consider what it would look like to sell the March 100/110 when AAPL get's to the $115 area and then wait for the next pullback to move into a more conservative call spread like the March 95/105. Right now the March 95/105 call spread is trading @ $8.28. Our March 100/110 is currently trading @ $7.15. If we could to sell our current spread at $8 that's a 60% return which is overall a very successful return on our largest portfolio holding. Once AAPL pulls back we would look to enter the $95/$105 March call spread @ $8 even. So out at $8 on one and then back in @ $8 on a more conservative call spread. What this does is give us the same goal of getting our 100% yield but with less risk. Instead of max value being achieved by AAPL hitting $110 by March we've lowered that requirement to $105 as the zone where we achieve 100% ROI
March 100/110 Call Spread:
Filled @ $5 = 100% ROI
Max ROI Achieved = if AAPL closes at $110 or higher by March expiration
Breakeven = AAPL @ $105
March $95/$105 Call Spread:
Filled @ $8 = 25% ROI
Max ROI Achieved = if AAPL closes at $105 or higher by March expiration
Breakeven = AAPL @ $100
Of we may just buy back our original spread at a lower cost basis and by buying back lower we will then have more cash on hand to increase our contract size.
So if AAPL were to get to $115 it will most likely be extremely overbought and so there will be an opportunity to buy back. That is the spot Apple is most likely to top out and then retest the sub-$110 levels. Think back to the last few post-30-RSI rebounds. All of them saw significant pull-backs before Apple moved forward. The Berkshire news took Apple for a 12.56% rebound over 10-sessions which lead to a top, a natural pull-back and then an accelerated sell-off back to the lows on Brexit. Then we had the post-Brexit bottom which took Apple up on an 11% rebound until about 5-days before earnings where Apple saw a sharp 5% pull-back going into the results. Sure Apple then gapped up after earrings, but not before pulling back 5% before that time.
The point here is that by selling at around the 10-11% mark will likely open up an opportunity to buy back at much lower levels. IF we could sell our March spread between $115 and $115.50 and then buy-back that spread at $108, we're so far ahead at that point. So that's what we're going to be looking for here. Either way we're in a great place in this spread with plenty of time to maneuver around it.