We're going to discuss a new AAPL short trade we intend to layer with our existing AAPL short setup. First off let's take a look @ the SPY: Here is the updated breakdown on that rising wedge, 3-push up patter which has been attempting to reclaim the breakdown of the rising wedge howbeit showing signal of still failing.
1) So again, we had a giant rising wedge.
2) Then a breakdown of that wedge.
3) Then a retest of the highs of that wedge to attempt to reclaim momentum & negate the bearish wedge breakdown..that is normal....we get a breakdown then a retest of that breakdown to see see if the breakdown is real.
What I will give to the bulls is that we're holding here above a near term descending trend line here above this green dotted line....however that we have those 2 large open gaps below price is net negative & further reinforces the bearish evidence that we're more likely to get downside pressure to @ bear minimum fill the first gap here around that mid $285 area. Filling that $250 area gap would require more dramatic bearish sentiment, which can certainly gain steam in the current environment.
The trading action today and over the past few weeks represents some very significant evidence that the SPY is very close to a major correction again. The daily chart is completely stalled out. The market hasn't been able to generate the requisite momentum necessary to breakout to the new highs. At least not on the S&P 500 that is. The NASDAQ/Tech is an entirely different story. But what we're seeing right now on the SPY is a clear indication that we're going to see a sharp pull-back probably to as low as $250. Monday started off really well. If the SPY then pushed above $300 on Tuesday or Wednesday, it would be different. But that is not what happened. After the huge gap-up, the market saw absolutely no follow through. We are where we were at the beginning of the week. The daily chart looks very stalled out and the consolidation is now looking fairly bearish. We're happy with our position now. If Apple pushes back above $320, we will be looking to put on an 80-20 short trade in Apple which we will discuss in more detail below. As our SPY trade is concerned, if the SPY pushes up toward this week's highs, we may consider buying another tranche of puts. We're already @ 20% allocated short on the SPY but we may increase that 25%. We're also @ 5% short on AAPL via our September put spread; and we're likely going to increase our short position on AAPL on a new trade model. For now, we're happy with where we're at. Now it's just a waiting game. I'm fairly sure we're near the highs on the S&P and fairly confident the SPY at least fills its gap down around the $250 area. It's still another 7-months until January. We will see that happen well before then. In fact, June is traditionally a very weak month for the market. The sell-in-May and go away adage is about the weakness in June. I think we can see exactly what we saw in 2018. A strong market between January and May and a huge correction in June-July which bottoms in July.
AAPL SHORT TRADE I was reviewing some price-change history for Apple and I have to say that we have a full blown short trade on developing right now. If Apple manages to push above $320, it's a clear-cut short. We will be adding a new short position on AAPL that is different from our already current September 18th $290 / $280 put spread. We bought that position for $2.65 and it's currently trading around $2.50 if anyone who has not yet considered that specific trade...it's here around $2.50 in value which yields 300% return so long as AAPL is @ $280 or less than upon September expiration. We will discuss the new short trade we're going to layer on AAPL.
First off, consider that AAPL is up 50% in 6-7 weeks. We've seen this occur in the past – not as robust as this rally – and the end result is we always end up with a -15-20% correction thereafter. For example, in 2019, Apple rallied exactly 52%, peaked and then sustained a 21% correction right after. We've seen this happens quite a few times in Apple's history. What's more, there is no reason for the stock to be this bullish. See below here back in the 2019 52% rally:
So here's what we want to do. If Apple pushes above $320, we're going to do a short trade that's on AAPL where whatever specific allocation we designate to this trade will be 80% short & then long hedged with a 20% position. That 20% long position will be modeled to simply act as a form of insurance to offset whatever losses may occur in the event that the short side of the trade is compromised if AAPL were to go astronautically higher for some bonkers reason. We'll layout the mechanics of the 80/20 short trade shortly. Again, the idea is whatever gets allocated to this specific trade, 80% of that trade is designated to the bearish thesis positioned short & then there is a 20% long hedge to act as insurance for the short side of the trade. If AAPL were to play out to the downside then the 20% long hedge is something we'd be fine with going to zero...it's insurance, nothing more. Inversely, if AAPL were to rip higher then long position would appreciate just enough to buffer out the losses on the short side for the entire trade.
But we really need to see Apple near a peak on overbought conditions for this to really work. Ideally, we want to see Apple push to $320. At least we'd like to see overbought conditions. Then from there, we may look to buy an August+ put-spread. After a brief pull-back, we'll look to hedge the position. Notice there are multiple sell indicators happening in Apple. It's not just the fact that it's up 50% in a month and a half. Apple's distance above its 50-day moving average is hitting bull market peaks. Historically, when Apple moves this far above its 50-day, it's at a dangerous topping point. I don't think we're going to see Apple or the NASDAQ-100 push to new all-time highs. We may get an incremental mark. But we're very likely to peak right around these previous highs. It's going to be a double-top of sorts is the point. We saw something exactly like that in 2019 after the 2018 correction. Granted things then moved higher after that. But we had a brutal correction between June and July of 2018. So we will look to do that here soon. Ideally, we would like to see Apple push to overbought conditions first. Once that happens, we can layer into the short trade. Remember, we're assuming THE MOST BULLISH ENVIRONMENT in the history of stocks. That's how stocks are trading. As if the economy is firing on all cylinders. It's acting as if we have robust growth, no inflation * 1% unemployment. Within that context, Apple has already enjoyed the most robust rally it has seen since before the financial crisis. What tends to follow is a massive correction. Remember, Apple is up 50% not in a year or in 6-months. It's up 50% in just 7-8 weeks time.