So Apple is going through the usual shenanigans that we warned would cage the stock in the intermediate term. We remember how bullish the sentiment was when AAPL had bottomed back in early July and begain rallying off the $92 area all the way up to around $118. We warned that eventually this too shall pass, and not to take any aggressive positions during the rally. It's why we were positioned long before the rally really started, & ultimately how we were able to get into our March 100/110 call spread @ $5 even on a heavy volatility pullback.
March 100/110 Call Spread → 100% ROI achieved so long as AAPL closes @ $110 or higher by March 2017 expiration - breakeven for this position is AAPL @ $105. For new Members, to better understand how Call Spreads work please review our prior post here
In regards to this recent pullback AAPL is going through, right now we're getting close to the end of this bearish cycle. Our forecast on the inverted head & shoulder so far is on schedule. And all though we're going to be vigilant on the onset of any further sucker punches, we believe that AAPL is getting closer starting the next wave higher. That catalyst will most likely occur post January earnings, but it's very much on the horizon when we look at this primary trend being cultivated. The macro picture is very bullish.
It's important to keep perspective during this pullback. In the grand scheme of things this pullback will look like a blip in the overall trend of where this is going. The monthly chart has extreme significance here. Take a look at the correlation of how a bullish crossover on the monthly stochastics, ascending MACD histogram stair-stepping higher, and MACD crossover impacts the future performance on AAPL. There is very much a relationship here. Take a look:
Does this look like a chart you'd want to bet bearish on? AAPL is clearly coming out of a major bottom and the likely forecast from here is much higher. When you get multiple bullish indicators on the macro time frames such as the monthly, the path of least resistance is higher. The usual pullbacks along the way up are all near to intermediate term blips, but the primary term trend is one that begins cultivating the path of higher-lows and higher-highs. What's more, we have confirmation of the uptrend when you observe the 20-week moving average crossing above the 40-week average. Since 2009 AAPL has never reversed lower when you see this alignment. The only exception to this was back during the financial crisis of 2008 but that doesn't really count as that was more of an exogenous outlier. Take a look:
In regards to today's pullback...this is what we've been waiting for. We want this to happen now instead of later. The sooner AAPL get's this pullback over with, the safer our March call spread is as the probability of AAPL closing @ $110 or higher by March is further likely. AAPL is down today due to another downgrade. We saw a subtle downgrade last week that Apple largely shrugged off but Apple is taking a larger hit on this downgrade. What's interesting is we've now had two downgrades on no new news. Apple is still performing within its guidance range and likely still going to report on the upper end of its guidance. The downgrade today brought the analysts price-target down from $129 to $127. That's really reaching isn't it? Those two are effectively the same price-target.
The good news is that Apple has now put in a clear-cut right shoulder down almost to the penny. Both prior shoulders right just above $108 a share and today's low is at $108.25. So we're talking right at the exact spot.
What's more, the fact Apple rebounded well off that $108 level today is good news because that is a line of support for Apple. With the QQQ's likely to extend today's rally for a few sessions, we should see more upside pressure on Apple in the coming days which should allow Apple to retest the $110 level again. And if Apple takes out that $110 level, we should see a blast off back to the neck-line. And that right there sets up a potential inverted head & shoulders breakout.
Now here is some further good news. When the QQQ rallies in the next few days off of these oversold level, it also forms a very significant inverted head & shoulders of its own. It's actually larger and more pronounced than Apple's. The QQQ's have tested this $113-$115 range on four separate occasions now. It has two shoulders and two heads. Take a look below:
Notice that if the QQQ gets back up to $119.60 a share -- a good possibility on this rebound -- we set up for a massive breakout with an upside target of $126.20 on the QQQ. The measured move on breakout is about $7.00. So that's a pretty solid set-up for the market and that should put Apple in rally mode as we head into January.
Now here is another interesting point to consider. During the first 30 minutes of trading, Apple experienced what could have been the very first sharp sell-off in this entire pull-back we've seen from the $112 level last week. The stock was down almost $2.00 at the lows. Yet instead of closing down hard like we saw during the first leg down of this sell-off, Apple reversed half of those losses intra-hour. It then rallied the ensuing hour. This means that the selling pressure in this leg lower is still far far lower than the pressure we saw during the post-earnings sell-off all the way down to the prior lows. Each segment of the sell-off during that sell-off from $118 down to $104 was more pronounced than this one. We either saw several consecutive hours of selling or hard selling. Here the entire pull-back is very jagged with Apple exchanging positive and negative hours. Now while that is bullish in that it means there's a struggle between bulls and bears and that there are buyers behind the stock. It's also negative in that it becomes hard for Apple to become oversold on the hourly.
Yet, on the other hand, even without Apple being oversold on the hourly. we did see the rebound nearly $1.20 off of its lows today. The target rebound from oversold territory is only $2-3. So we're already seeing the same impact without Apple even having gone oversold. And that's again due to the fact that there are people buying up every segment of this sell-off. For every red hour we have a green hour.
Finally, it's important to remember that as the last six trading sessions go when the QQQ's started to roll over, Apple is still outperforming at the moment but slightly. The QQQ's are down 2.4% and Apple is down 2.33%. And that's with the QQQ's being up 0.78% today versus Apple's being down -0.72%. Apple is basically catching up to last week's sell-off. Here is how Apple's inverted head & shoulders is shaping up:
UPDATED - APPLE'S HISTORICAL PERFORMANCE RESULTS UPON HITTING A 30-RSI EXTREME LOW
Here's another thing that we need to discuss. It is possible that we could be seeing the smallest post-30-RSI rebound in Apple's history. Now we have seen situations like this in the past where Apple rebounds, peaks for a few days, pulls-back and then continues its rally to reach that 11%+ mark. That's why some of these rallies lasted 15-20 days. Apple initially surged, pulled-back, consolidated and then continued on to a peak. If Apple were to bottom tomororw and then rally back up to $112 and beyond, this would all still be part of the same rally. However, if Apple isn't able to pick up and soon or if it falls under $108, then this rally would be distinguished as peaking at 8.09% and 10-sessions. That would make it the weakest post-30 RSI rebound on record for Apple. And this one is legit because we're no longer part of the same downtrend. Apple bottomed over 15-sessions ago. This isn't some 3-day rebound or something. This has been a long rebound and Apple has been hanging at least 5% above its lows for the entire duration. Even now Apple is up 5.09% above its lows. So this is very different than those August 2015 and December 2015 corrections which were part of the same leg down. So that is something to watch for. Like if Apple is up to $110.70 tomorrow, then it's all still part of the same rebound. But if Apple can't manage to push back toward the $112 level and soon, we will have to call it. Of course, the future can always change that. IN many ways, we will never figure out where to call this top (or bottoms) until sufficient time has passed. For example, we could see Apple fall to $107.30 tomorrow, call it and then Apple could rally up to $115 in the next 7-days. What do we make of that? Technically speaking, Apple hit a 30-RSI and within 23-sessions will have made an 11% gain. It would still be within the time and price parameter at that point. Remember, in the post 30-RSI Event analysis, we're simply outlining how large of gain was made after Apple reached a 30-RSI and over what duration. For all we know some of those rallies could have seen the meat of the returns happen in 3-days while the peak happens 20-days later. So it's something worth monitoring here:
Again, we're mainly concerned about how all of this plays out with respect to our March spread and the timing of the cycle. If Apple were to continue to slide on this pull-back, most likely it will be sitting well under a 30-RSI by the time it hits its lows at $104. We would probably be sitting at a 25-28 RSI at those levels depending on how Apple were to sell-off. If we had 2-3 big down days, then even worse. Big down days tend to lead to larger losses on the RSI. It's the up days in-between that can stall things.
But notice that if Apple doesn't slide on this leg, we are now down enough where the leg is very pronounced on the daily chart now. Meaning, if Apple finds its footing here and beings to rally and takes out $112, this entire bear cycle that we've seen since October earnings is over. And that's because it will just be a higher low on the chart. We are low enough now that this constitutes a leg down. Whether that leg falls short of the lows or marks a double-bottom, as the daily chart goes, this is a leg lower. You can see it for yourself here:
The point here is that the bears are just as much in a precarious place as are the bulls. If not a more precarious place. Imagine if you're short Apple here and on the bear case. You can see very clearly at this point that Apple is likely be at a 30-RSI again at the lows and in that case the value proposition to be short at a 30-RSI is not a very attractive one.
So at best, the most you can hope for here is an incremental new low and that would likely mark the end of the selling. Why? Because if the stock can't make substantial new lows, the momentum is dead. That's how things sort of end. Look at the post-April earnings lows for instance. We hit a low point of $88.50. Apple rallied on Berkshire right? It then sold-off again and came close to the post-earnings lows. But then the market and Apple started to rebound again. Once that happened, Apple put in a double-bottom and the sell-off ended. Well we're in the same place here except we can anticipate how this will go given the state of the daily RSI. Because the RSI didn't move up enough on the rebound, chances are Apple will only be able to make incremental new lows at worst leading to essentially a double-bottom. That's an at-worst scenario.
But given the nature of the selling that we've seen since this pull-back from $112 started last week, I'm not sure Apple bears will have enough momentum to even get the stock down to a 30-RSI. Remember, the first leg down only saw a session where Apple closed below 30. That's all the bears were able to muster on the post-earnings sell-off. And typically speaking each leg lower sees a loss of momentum unless a stock is going bankrupt or something. And that has been the case here. The point is that I think Apple bottoms at a point above the 30-RSI level if this sell-off were to continue. The fact that Apple bulls keep taking Apple back up to near $110 by the end of every session speaks volumes about the sell-off here.
Finally, here's another point worth mentioning. For nearly every quarter in the past several years or so, Apple stages a late quarter rally heading into earnings. Now that rally doesn't always lead into earnings, but at some point in time ahead of earnings a rally is staged. The only exception that I've seen in a long while is last December but Apple was undergoing a pretty significant crash and was in the middle of a pretty significant bear market. The market was also selling off during that period. Right now the market is rallying.
If you go back and look at any other quarter, you will see a late-quarter rally. Apple has essentially been selling off since it reported excellent earnings in Q4. And that earnings report -- regardless of how the facts are being massaged -- were excellent. Why? Because Apple made all of its numbers and gave estimates well above wall street expectations. What else can someone want out of a quarter? Apple was billions above expectations on the top line for Q1.
But consider the point at hand here. Back in February, Apple rallied until it peaked out 8-sessions ahead of its earnings report. It sold-off on that report, remained somewhat bearish up until the end of June and then rallied all of July as it headed into its earnings report. The point is that we saw a rally going into April earnings and another rally going into July earnings. Apple then rallied basically all quarter last quarter. If we go further back, Apple sold-off in late June of last year and staged a 10% rally going into Q3 2015. It then sold-off on its earnings report, continued selling off well into August and then staged a rally going into October. So even all of last year what we saw were rallies going into the quarter's earnings report. We saw that rally happen either immediately ahead of the report or for a period ending a week or so ahead of the report.
Right now we have roughly 35-sessions until Apple reports earnings. The stock has been sell-off essentially for about 28-sessions now. With the exception of 6-bullish sessions, Apple has been sold into for the last 28-sessions. If you go on this cycle, Apple should bottom out sometime by mid to late December and then begin a rally sometime around Christmas and ending right near its earnings report. I think there's a good chance Apple goes into its earnings at around the same levels we saw going into October. We should see another 10%+ rally going into the report.
Now this is all aside of the fact that we could be seeing an inverted head & shoulders playing out right now. I'm just taking time-cycles within a quarter. That even if Apple were to continue to sell-off here and ignore the market rally, chances are it will rally into January earnings regardless. And chances are Apple will be back near its high as it heads into that report. It has sold-off nearly all quarter long now. Well we're just about half-way through the trading quarter now and Apple has gravitated to the downside throughout that entire period. We should see a 3-4 week period of rallying -- and that held true even in the bear market.
For further perspective he one-minute chart on Apple demonstrates the smoothness of this pull-back that I've been taking about. We have almost no sharp selling this pull-back or any real volatility. Compare how Apple is trading right now to how it traded in the early part of November:
In fact, if you look at only the last 15-sessions (last three weeks), this pull-back ALMOST looks like a bull flag. It isn't simply because Apple tried sideways from November 21 to November 30. If Apple had not traded sideways during that period but began pulling back like this around November 22, this would look like a bull flag because the sell-off isn't at a greater degree or angle than the prior rally. This almost looks like a bull flag:
And a side note, look at the hourly chart and consider it inverted. If the situation was flipped and Apple were rallying right now off of some lows, does this look like a rebound that has legs? I don't think it does. And there is virtually no difference in the pattern. The pull-back that we've seen from $112 so far is just pretty weak when you look at the prior trends:
And here's something to think about. If Apple gets down to a 30-RSI a second time around after just having been there only a few weeks early, you can bet that we get a very significant rebound this time around. Meaning, chances are we see Apple get up to $115-$117 a share on this next rebound. Especially because we would be putting in a double-bottom and testing $112 YET AGAIN. We just need to be thinking about the timing of all of this.
To put timing in perspective, consider this. Apple was sitting back at its highs on earnings day a mere 28-trading days ago. It took Apple 14-sessions to go from $118 down to its lows at $104.08. Apple has been selling off for 6 out of the last 8 sessions now losing roughly $3.40 in the process as of this moment. Yet, this leg down could be said to have started really 5-sessions ago. If Apple were to follow the trend that we saw during the first leg down, Apple should hit its lows by December 19 which happens to fall on a Monday. That is actually very consistent with the trend of Apple bottoming on Monday's. Then Apple should rally and top out sometime between January 6 and January 13. That's just about 6-7 days before earnings day.
Now that is if Apple were to take its time. But seeing as how Apple looks like it wants to close below $110 today, it's very possible that we could see Apple get to those lows by this Friday. If Apple were to sell-off $2.00 tomorrow down o $107 a share, we could be sitting at a 30-RSI by Thursday and setting up for a bottom by next Monday with a test of the 200-day. Now that is if Apple follows this alternative route of testing the lows. It may not ever go down that route and there is strong evidence that it won't.
But if it does, realize that we would be seeing Apple testing a 30-RSI for a third time this quarter, Apple would likely form a double-bottom and chances are that when Apple does rebound, there's a good chance Apple goes for a full 12-15% run and there's a good chance that run happens and completes just about a week or two ahead of earnings.
I think today's session will be very telling. If Apple recovers today's losses and closes at $110, I think the thesis that this is a lame leg lower holds true. That will be yet another reversal and yet another successful move by the bulls to reverse the losses. If Apple closes down here at $109 or under $109, I think the bears have some legs. We may very well get down to $106 and test that 30-RSI level again. The big thing is that we do have the QQQ's which still need to rally another dollar or so. At a bare minimum I'm expecting the QQQ to go up to $117.50. But most likely we should see the QQQ's get up to a 70-RSI before topping out.
But the take away from all of this for us is this. I think from a timing point of view, this all works out wonderfully for our position. Either this pull-back is weak and Apple puts in a higher low leading to an eventual recapture of the 50-day and a push to test gap-resistance at $115; OR Apple gets down to the lows again, forms a double-bottom and then rockets right back up to $112 setting up a rally back to the highs. The latter is in some ways more productive. I think if Apple gets down to a 30-RSI again, it's really going to set up for a massive move to the upside. So in some ways that is better and we're only talking $3-$4 of downside from current levels in the month of December. So in many ways that's better for us.
A final thought here is this. Don't get too caught up in this bearish action. It's important to remember that in the 2013-2015 bull run, Apple had multiple periods where it traded sideways or where there were long periods of bearishness. I mean there was a 6-month period where Apple didn't make a single new high. So it's not uncommon for Apple to see corrections or enter bearish periods during the bull market. This just happens to be one of them.
And really by comparison to what we saw in 2015-2016, this is tame. Apple only lost something like 12% from its peak on this correction. That's nothing by comparison. In August 2015, we saw Apple go from $130 down to $90 a share. In November - January 2015-2016, Apple fell from $124 down to $90 a share. That's a 27% sell-off in just two-months time. Even now this leg down from the peak last week is only a whole 3.1%. That's nothing. There were days where Apple lost 5% of its value. IN a single sessions. So it's very important to keep all of this in perspective. And I think what it indicates is that this correction we're seeing is more on the normal non-bear market side of things. That after its over, chances are Apple will test $120 again and likely take out those levels. That we should see a resumption of the bull run. And remember, that has very little to do with the near-term earnings outlook. The entire bull run is based on the long-term outlook for the stock whereas bear markets are overly focused on near-term issues. I still believe that the bear run ended in June and that we're merely in a corrective cycle in a new bull market. Otherwise, we would be sitting at the lows right now. We would be sitting up here near $110 a share. It's important to keep that in perspective. Overall, Apple is a mere 8% below its peak on the bull run and trading nearly $20 or over 20% above its bear market lows.