So there are few things that we need to acknowledge about the recent move on AAPL and how it pertains to our current positions & next setup. Keep in mind that over the last 3 months AAPL has rallied more than 30%. And when you count the May 16, 2016 low of reaching $89.47 AAPL has now rallied more than 52% over the last 9 months. So that the largest company in the world has rallied over 50% in less than a years time is a worthy acknowledgement.
Take a look at this weekly chart for perspective:
We have reached some glaring extremes in regards to how large of a move this breakout on AAPL has been. We all need to be cautious and ready for a pullback at anytime. (We'll define below). AAPL hasn't seen this kind of back to back upside momentum in over 5 years. A pullback is very much on the horizon, so be careful thinking this will be a straight shot to $150 before April earnings etc. Everyone is "feeling" that right now. Just like many times in the past, when bullish sentiment gets this strong & exciting...this too shall inevitably pass & we'll get into a new period where the media goes back on the negative bandwagon as trading momentum stalls and sentiment starts to shift again. What we want to discuss is how we're getting into our next position.
First off, in regards to our AAPL activity & current position(s), congrats to all Members for the recent gains! Let's take a quick look at where those positions stand.
purchase entry: $5
Max Value potential: $10 if AAPL closes @ $110 or above by expiration
Closed out @ a cost basis of $9.10
Gain of 82%
→ We then rolled over the gains from our March spread into the July 100/110 call spread.
purchase entry: $8.10
Max value potential: $10 if AAPL closes @ $110 or above by expiration
present value: $9.60
Gain thus far of 18.5%
January 110/120 (Stock Replacement Strategy)
purchase entry: $4
max value potential: $10 if AAPL closes @ $120 or above by expiration
present value of $7.50
Gain thus far of 87.5%
We closed out the March spread with more than a net 80% gain & then recently rolled that over to the July 100/110 call spread which we were able to catch on $8.10. That was largely a hedge to counter against the possibility of AAPL pulling back on earnings. Something that very much did not happen but it was a possibility that needed to be modeled for. Notice that the July spread is currently trading around $9.60 so we're already up about 18%, and now compare that to the March spread that we recently sold...the present value of that same March spread is @ $9.90. So had we not rolled into the July spread and were still just sitting in the March spread we'd be up a paltry 6%. That's exactly why we hedged our position and went out for the longer dated July spread because it was cheaper and had more upside potential for us to travel from $8.10 to 10 vs the March spread going from $9.10 to $10. We made the bulk of what we needed to out of the March spread so a rollover was a prudent move that would also afford us more time if AAPL took a negative turn. We will always do some form of mitigation or hedge when we've run the bulk gains out of a call spread.
Now looking at our other AAPL position, our 2018 January 110/120 call-spread is now trading at around $7.50...so currently up with a +87% gain since our $4 entry. As you've noticed, the 2018 January 110/120 spread has increased significantly now that AAPL is trading well in the money here at around +$135 a share. This is a a position that will reach full value of $10 for a 150% gain so long as AAPL closes @ or above $120 by January expiration. A very reasonable target, especially considering the current breakout & upcoming forecast trajectory that has a high probability of fulfilling.
So...I know right now AAPL is trading well above $120 ...& by now many might be feeling that we totally undershot the target potential and should have been in something more aggressive like the $120/$130 spread that was yielding a higher 250% gain potential at the time.
Here is where the January 120/130 call spread was trading when we took a position on the January 110/120 call spread. Notice that the low of the day was $2.46 & the high of the day was $3.26.
And here is where our January call spread was trading when we took the trade @ $4 back on Nov 7, 2016.
So in retrospect it's easy to feel like we should have been more aggressive with this trade, but we had to hedge against the possibility that AAPL wasn't ready to break out yet. It was a distinct possibility.
One can easily argue/feel that this position was way too conservative. In fact, I've even received an email that was echoing this sentiment wishing we were in a more higher yielding call spread. I understand that it would have been nice if we pushed the needled and were in something more aggressive. Again, REMEMBER, this trade was explicitly defined as our STOCK REPLACEMENT STRATEGY where we were selling our common stock and replacing it for a position that could far appreciate in value than what holding the common would have done, but still do a great job at hedging at the possibility that AAPL could struggle through the year yet still produce oversized gains. We wanted a position that wouldn't stress Members out holding something much more aggressive like the January $130 / $150 call spread which was a +5x bagger at the time. We outlined that even in the most bearish scenario, that AAPL trading to $120 by next year was a no brainer. We were modeling for the "possibility" of what AAPL would look like being in a bear market... that we could still make a 150% gain. So that was the idea there. We wanted to replace our common stock and get into something with far more octane that could still do well even in a bear market environment. Either way, we are in positions that give us a lot of trading leverage & high peace of mind. We will inevitably sell those positions & rotate into higher yielding call spreads so just practice your patience here. The market will give you handsome returns more often than not in time.
Notice the best opportunities happen in the most bearish environments. Like where did we do all our AAPL buying...back when the majority was thinking the worst. Now the sentiment has totally shifted and everyone is delirious with glee & AAPL invincibility. As I've said before, this too shall pass. In fact, today is the first trading day of AAPL where we're getting signs that this rally could be topping out. Nothing conclusive just yet, but todays intraday reversal is the first gesture that the rally could be losing steam any day/week now. We'll get into that in more detail but for now we need to watch what's developing.
Yet, I regress for a moment...we need to acknowledge something very important about this recent breakout on AAPL. It's different than previous quarters. It's not to be taken lightly and very much the real deal. It's unlikely we will ever trade below $120 again. So although AAPL is due for a pullback off these extreme overbought readings, it's unlikely the sub $120 land will ever been seen again, at least not on schedule. Sure, give us a black swan event and we can see sub $120, but just given regular market & media shenanigans and this new quarter will oscillate in a higher trading range all above the $120 mark.
I've spent significant time analyzing the current momentum environment we're seeing now and backtested against over 10 years of data to help us model out a scenario forecast for what we can expect going forward for the new quarter & the remainder of this year. We're going to discuss how we want to make our next entry & more specifically what we're going to be looking for as criteria before we make our next entry.
First off, we've been talking about AAPL bottoming since since as early as June. We laid out very succinctly why the next cycle for AAPL was higher from back June, and we've been successfully playing it to the long side ever since.
Let's take a look at that macro picture on the monthly time frame and see where it all stands. It's STILL ULTRA bullish & there is a helluva of confluence here showing you that 2017 will be a very strong year for AAPL. Like, there is still a lot more upside travel for AAPL to go. Keep in mind that we will inevitably get some thick consolidation & the regular bevy of pullbacks along the way up. But the way to trade AAPL is towards the long side from here. That's really been the case since our first buy alert back in June for that matter. We're just getting confirmation of everything we've been discussing since early summer of 2016.
So notice the correlative relationship of this massive bullish crossover (when the red line crosses above the blue line off the lows - 2nd pannel) that's occurring on AAPL. From peak to trough, off the lows, anytime in AAPL's history whenever you get a crossover like this, it's a fools errand to try and short or assume AAPL is a "done stock." AAPL is just one of those stocks that can't hide it's poker hand very well on the charts. And inversely, you can clearly see when the air is coming out from the top you get a confluence of indicators on the monthly chart that start to confirm with one another that things are looking toppy and the result has always been that lower prices start to follow and AAPL begins a new bear cycle. The most important crossover to look on the Monthly time frame at has always been Stochastics....in the current environment we have a bullish crossover off the bottom range, which shows you that the big boys are absorbing higher bids per pullback. The result is what starts to cause this change in both MACD & stochastics.
Now in regards to AAPL's post earnings breakout....we were ready for that on the long side with our 2018 January 110/120 call spread. That spread is what's largely allowing us to participate in this upside move. We purchased that at about $4 and it's a position that will be worth $10 so long as AAPL is at or above $120 by 2018 January expiration for a 150% gain from now till then. Since our $4 entry that spread is now at a value of about $7.50, so we're currently up huge on that play. That's it's our largest allocation holding in the portfolio which will have a very net positive impact on our gains going into 2017. So we're set up nicely on the long side there.
THE CURRENT SITUATION
Today's action in Apple creates a good news and bad news scenario for us. The good news is that the stock is in a new bull market for sure now. There is no double-top potential at $120 and there is no concern that had there been a gap-down after earrings that the stock could roll over significantly as a result of not getting through $120 on a second major test (the first being last quarter). The bad news is that it is going to require patience before we get into our next buy alert on Apple. But AAPL is now at peak extremes being overbought as it's been trading at a 90-RSI on the daily chart & the hourly has also reached massive extremes as well. That is the opposite of trading at a 25-RSI essentially back when we were buying positions. So that's the most important thing to distinguish here....when AAPL is at peak extremes its almost never the time to be buying the stock. Unless you're an active trader who can go in & out fast, we don't recommend buying up here. The time to be shopping for the next call spread is when when the oscillators are at low levels, not here. More specifically we'll identify what low point we're looking for. AAPL is not anywhere close to topping on the primary term. The primary term time frame shows that AAPL has lots of runway to go before we get close to some sort of mega top. Instead we'll be looking for an intermediate to near-term top. We'll explain further below.
First off, it has been a very very long while since Apple has rallied toward a near 90-RSI on the daily chart and we've seen much of the same consequence when that happens. Usually, there is more upside in the near-term and then a correction after. Whenever Apple rallies to a 90-RSI it has meant the run is almost over (1-2 weeks)...at least in the intermediate term trend. This run is now +30% and counting in just about 3-moths time...or about 50% now from Apple's bear market lows back in May of 2015. It's sort of the same situation as when Apple rallied to $564 from its $388 lows back in the 2013-2014 era. Apple made that run over nearly the same period of time when it bottomed in 2013. It was actually a little less back then. So in some ways, this bull market is a little stronger than what we saw off the lows in 2013.
Anyways, the point here is that it's going to take time to take another position into the stock. We have our January & July spread so we are participating in much of this upside run already. Before we take a new position, AAPL will need to go through a topping process of some kind. We're NOT expecting a top in the sense that AAPL is done. We could very well be well past $150 before years end. What we need is an entry on a new spread when AAPL experiences a pullback which is consistent with historical precedent.
Finally, we have first-half seasonality which is beginning. Apple has been on a huge run since May. At more than a 50% gain since then, the rally isn't fresh or just beginning. The largest company in the world just rallied +50% in 9-months time. All of these things point to a significant correction soon. At some point, we're going to see a sharp pull-back. Don't think that AAPL can't correct back down to the low $120 area. It very much can. I know it doesn't feel like that's a possibility but if you go back through history you will very much see much of the same. AAPL rallies hard and then pulls back anywhere from -7 to -13% per quarter after strong rallies like this, when in a confirmed uptrend on the primary term direction. Since late July of 2016 AAPL bottomed and was categorically in a confirmed uptrend, and since then the pullbacks have been consistent with historical analysis. When we look back on the parabolic rally that ensured form July of 2013 - July of 2015 AAPL saw much of the same as it's corrective pullbacks were within that range of pullbacks. Take a look at AAPL's pullback history here on the weekly chart:
PARABOLIC RALLY OF 2013 - 2015
Apple might trade slightly higher from here, top out and then finally see a sharp pull-back. We'll start to look at some comparable historical runs. But there aren't as many as you might think because in most cases, Apple doesn't go up to an 85-RSI after earnings. Not after the parabolic rally in January or after the big run we had in April 2014. In the April 2014 gap-up, Apple had just hit overbought conditions after consolidating for 5-months and it was sitting near lows. So that was a different scenario. It would be like Apple gapping up to $120 from $112 after sitting at a mid-50-RSI and then becoming overbought today. The same goes with the parabolic run back in January 2012. Also the parabolic run in 2012 came after Apple had underwent a long 6-month consolidation. Apple hit $400 (pre-split) a share in July 2011, traded up and down with volatility until December 2011 and then had its big run after earnings.
PARABOLIC RALLY OF 2012
So it's prudent to understand that we should expect... that eventually this rally will cool off and we'll get our pullback opportunity to take a new position on AAPL.
RSI INDICATOR & IT'S CORRELATION TO AAPL PULLBACKS
Right now AAPL has been breaking new records on reaching the highest RSI on the daily it has ever seen. So I went back and did a cursory look at Apple's prior 85+ RSI events and you have to go back all the way to 2011-2012 to see events like these. Typically when RSI gets anywhere from 70-80 it has always meant that a pullback was right around the corner if not the very day of. However, there are times when if AAPL broke a new high RSI on the daily, it meant that AAPL was NOT going to play the predictable ebb & flow of pulling back and instead just went full throttle higher. And RSI very much tends to work like this, that when you get a record high print on RSI, it usually means that this time is in fact different and usually you see stocks go even higher. So RSI is a guide but it's not the only thing that's considered in determining a top. However, a new high print did usually mean that a top of some kind was around the corner.
Again I want to make this distinction:
High RSI tends to mean time to sell but if too high then it usually means that the stock goes much higher then you think. So be careful thinking that just because a stock hits a certain value of high RSI that it needs to come back down. That's the rough of that. Stocks that are hitting extreme overbought tend to mean that there is a change of the norm & can go much higher. BUT, when RSI is at a high, it's always been prudent to start preparing for a pullback ...keywords here...at some point. And even then, it's not an absolute time but usually just a intermediate to near term top in the larger trend going higher.
Looking back to the break away gap of 2012 we see that AAPL never refilled that gap and was off to the races. This was a rally that took RSI values past the 85 RSI value...not as high as the 90 value that we've seen even in this rally and look how the stock performed in that era. The pullbacks were very shallow. Here is the daily chart from 2012.
And here is a broader view on the daily showing the general ebb & flow of what high RSI values tend to do. We get the larger pullback mostly when we see bearish divergence on RSI where the stock makes higher highs but on lower RSI.
We should expect a pullback once we get AAPL making new highs on lower RSI. We'll be looking for much of the same.
But we may very well get long once we get a 5 to 8% pullback of some kind. Beyond the mini pullbacks, there is another stage we should encounter soon which is the larer consolidatio/pullback period. Like I said, AAPL isn't going to just go to 150 before a significant correction/consolidation period first. We've been mentioning how this bottom and the ensuing rally was mirroring almost to a T the rally & pullback environment of 2013. It's still showing signs of very strong semblance even now.
Take a look at the weekly chart showing the scope of the time periods & gain potential that tends to develop here:
Notice how the correction the previous correction from peak to trough back to the peak (yellow highlight) took 2 whole years. And on schedule, this recent mega correction ALSO lasted a whole 2 years from top-to-bottom-to-top (yellow highlight). Now notice the ensuring rally once the old high was revisited (green highlight) which went on a rally making higher highs for about 6 months. Within those 6 months you'll notice that AAPL went through 2 month long periods of consolidation/pullback before rallying yet higher.
We should experience something very similar here. What we want to do is be entering our new long positions in a combination of a mini pullback & also another position within the consolidation period. Those will be our best opportunities to take new longs.
Just remember, if you're experiencing FOMO here, this AAPL rally isn't at early stages. It's at late stages. Even during the 2012 parabolic run for instance, all people remember is Apple rallying straight up from $400 to $644 (pre-split) a share. But that's not how it went down. Apple saw two separate $40 pull-backs (nearly 10% each) followed by a 20% major correction. Each of these followed Apple hitting a 90-RSI on the daily. First, we had a 7.56% pull-back near the 90-level. You know, Apple never even reached the 90-level on a closing basis. It was all intraday.
So here's the bottom-line. I think with Apple sitting at an 90-RSI on the daily, even if Apple only closes slightly in the green the next few days, things will look radically overbought. Because as important as closing above an 85-RSI is closing above those levels for several days on end. You want to see a thick bar of overbought conditions. Usually that typically means we're nearing the end of a run. Apple is simply too ahead of itself here. Our game-plan is to buy when Apple gets down to the $120 level. $120 marks a good entry for an entirely different investment thesis. The March spread that was rotated into the July spread marks the end of that particular kind of trade and I think we need to be thinking about the start of a whole new trade -- and that would be the July $120-$130 spread range. So we need to be thinking about July $120-$130 spreads here when Apple gets down to $120 a share. Notice that at a pull-back from $135 down to $120 a share is a mere -11% pull-back. So it isn't much and very much in line with that kind of pullback corrections that AAPL is accustomed to retracing back to. But the reason I like the trade is because of what this run has suggested. And that is the fact that Apple is ready to make a firm breakout run past $135 and up to possibly $150 a share this year. The reason we would target $130 by July is because I believe we will see a first-half struggle and then another big second-half rally.
Now if Apple does push up any further and we see RSI start to diverge down, there is strong case to be made on shorting AAPL for a near-term trade. However we most likely will not be attempting to short AAPL here. The risk is largely to the upside, not the downside this year. There will be a great opportunity to short AAPL in 2018 only once we get the top values of the monthly indicators start to slope down in bearish crossovers. Like we've seen here which proceeded every single major correction on AAPL. Same chart as up top of this post but now just take notice of what stochastics and MACD histogram do when AAPL is starting to enter a bear phase. Here is the monthly chart where you see the bearish crossovers
So there will be plenty of opportunity to play AAPL to both the long side & short side. But we wouldn't short until we get monthly confimration that AAPL is about to enter a new bear period only on the primary term time frame. But in the near term, history has demonstrated that when Apple reaches near a 90-RSI on the daily, it has lead to some very heavy short-term selling. Think about it, funds & institutions have done the bulk of their buying down lower. They're now looking to relieve some pressure off this top range and take profits. Newbies are mostly buying right now.
Ok. So here is the bottom line is that we got the history down. We know what Apple reaches a 90-RSI means. We know what Apple spending days trading above an 85-RSI on the daily means. Now we just wait for Apple to go through a pullback of some kind. We're looking for divergence on RSI on both the daily & hourly time frames. And we'll potentially entering in on 2 kinds of pullbacks when we get a short term pullback and a larger consolidation phase that is consistent with proceeding the next leg higher. We may have already started that consolidation period effective over the last 2 days, or AAPL is simply getting ready for a mini pullback. We'll be watching.