Decline in Selling Momentum (and a Note on Earnings)

December 12, 2012 (1:30 pm)

The momentum in the selling pressure is starting to ease pretty substantially now. We’re seeing a divergence between the momentum (measured by the RSI) and the trend. We’re also seeing a number of other indicators signaling an impending trend reversal. As Apple’s stock price falls, the buying momentum is rising. And over the past few days, we’ve seen a number of reversal days in a row. You see these changes in trend and numerous reversal days fairly consistently during longer-term tops and bottoms. Bottoming is a process. The fact that we’re seeing gap ups fade during the day, and gap downs get bought shows us that the buyers and sellers are in a tug-of-war. The bears, who have controlled the last 10 weeks almost entirely, are starting to give up a lot of ground to the bulls.

We may have formed a double bottom already, or we may see a re-test of the lows near $500. Either way, I think we see a huge rally in early 2013. The earnings report in January could even lead to another parabolic rally. Remember, we’re trading below a 12.0x P/E down here. Last January, the shares went from a 12.6x P/E to an 18.3x P/E in 10 weeks. Talk about the end of Apple’s innovation and the company’s death have been greatly exaggerated.

Head & Shoulders

As we discussed over the past week, Apple has formed a pretty monstrous head and shoulders pattern.

We’ve actually seen this happen multiple times with Apple. Whenever it does, we have people calling for the “end of Apple innovation” and a huge price drop. Right now, it seems like everybody on CNBC is saying that Apple will probably drop to the low $400’s. Instead, the last two head and shoulders Apple formed were just massive bear traps. They lured in bears with the smell of honey, just to endure a dramatic rally.

Apple Earnings

It seems like all of the bears love to talk about supply constraints. Since the correction began, there have been rumors that the iPhone 5 has been heavily supply constrained, driven by the long wait time to purchase one from Apple’s online and retail stores and backed up by Tim Cook’s admittance on the conference call. Since then, wait times have declined to less than a week. Further, the conference call took place at a time of peak supply constraints. It could very well be that those constraints have since been solved. Apple told us to expect $52 billion on the call – a number that they definitely gave a lot of time solving for. It’s likely that they came up with this number factoring in supply constraints and other dampening factors. With those constraints largely lifted, and the product likely to be selling in 100+ countries by year end, that $52 billion will likely look very conservative when the actual figures are released.

On top of that Tim Cook and Peter Oppenheimer just missed two consecutive quarters. If I was them, I know I’d choose a conservative number to keep expectations down and allow me to safely beat them by a solid margin. Do you think they feel differently? To make things even easier, Wall Street’s expectations for the current quarter very low compared to Apple’s guidance. Everybody’s expectations dropped because of the earnings miss in October. Apple is now “broken”. It is my expectation that the report to be released in 5 weeks will clarify Apple’s position of dominance.