Apple Update (and New Evidence of the Bottom)

December 19, 2012 (12:00 pm)

Lot’s to update around Apple this morning. This is an important post with new information, so try to get through all of it. Email me (or post a comment) with any questions you have. I posted briefly on Monday while I was traveling that Apple was getting down to some pretty extreme oversold indicators on Monday morning when it gapped down to the $500 level. We’ll leave the discussion for my thoughts around the Citi research report for another time. Suffice it to say, I think they did a masterful job of getting any remaining small retail investors to sell their shares directly to Citi’s big fund clients. The Chi Money Flow is one of the big tells here. But I’ll discuss that more in detail below.

Positive Divergences

The daily chart (which has a single candle for each day, versus the 60 minute chart which posts an individual candle for each hour timeframe) is most important for identifying intermediate- and longer-term trends. On Monday morning, we confirmed a very significant buy signal. The price made a lower low, while both the RSI and Chi-Osc formed a higher low. See the red lines on the chart above. You’ll see that the RSI and Chi-Osc were much lower on the first bottom than they were on the second bottom. This means that while the shares fell to a lower price, they did so on much slower selling pressure. Momentum is turning, and these indicators tend to call longer-term changes in trend.

Double Bottom Reversal

On Monday morning we alluded to the potential of a double bottom reversal. You can see below why this is still squarely in play. Monday’s test of $500 and break below the previous low of $505 was quickly bought up over the subsequent two days. We’re now confident that this re-test of $500 is the low for this sell-off. The bears tried twice to break that level and failed. Now it’s time for the bulls to try to break $600 again. If we’re able to break through the $594 level, which will no doubt put up significant resistance (just as $555 will), I fully expect Apple to re-test its all time high’s at $700 before April.

Long-Term Rising Channel

One important aspect to analyzing technical trends and chart patterns is to understand that even the clearest of trends can be pierced briefly and still stay relevant. For instance, we broke below the lower trend line of the rising channel below. This has been a crucial long-term trend line. We broke through it on heavy capitulatory selling and have now retaken it. Is the trend line invalidated simply by two days of selling? No. If there shares weren’t able to quickly bump back inside the channel, we’d have to rethink its importance. For now, it’s as relevant as ever.

Chi Money Flow

As we alluded to above, Citi’s report downgrading Apple on late Sunday night did a masterful job of getting any remaining small retail investors to sell their shares to Citi’s big fund clients. I realized exactly what had happened when I looked at the charts on Monday night. Take a look at the bottom part of the following chart (called CMF or Chi Money Flow). The money flow is the big tell. You’ll see that during the November 16 bottom at $505, the money flow was extremely negative, indicated by the little blue circle). This indicates that there was mass distribution of shares. Big funds and money managers were among those selling shares. The net effect was a massive outflow of funds from Apple shares.

Now look at Monday’s re-test of the lows at $500. The inflow of funds was relatively equal to the outflow. This means that there was a lot of new money coming into the shares – in fact, there was as much new money coming in as there was money coming out. Who was there to buy those scared little retail investors shares? That’s right. The big funds that work so closely with Citi. Don’t believe that the odds aren’t stacked against you as a small investor. The big funds, banks and market makers all know more than we do and they all know what will scare us out of our shares. Don’t let them.

An Important Trend Line

There’s a relic from the correction that we’re still dealing with. It’s the downward sloping trend line in blue on the chart below. Look at how many times this specific trend line has acted as strong resistance (and one instance it acted as support). Breaking through $533 today on volume will be important to finally get through this trend. Interestingly, the purple trend line has acted as support since mid-November. We’ll be confined between these two trend lines until finally able to break through the blue trend line on volume.

Closing Thoughts

On Monday – and maybe even still today – a majority of those that closely follow the markets believe that the Apple story is dead. I can tell you that it’s not. You will see an incredible shift in sentiment come the new year. People will start talking about how many iPad mini’s and even iPod Touches Apple sold over the holidays. The iPhone 5 roll-out is the most robust in company history. They will sell a lot of iPhones. All the noise over Walmart discounting price is just that – noise. Apple isn’t taking a monetary hit here. Instead, Walmart is using the hottest selling product as a loss leader to get customers in their stores. The fact is, they don’t even have that many iPhones to sell. I’ve heard multiple reports of Walmart selling out in the first day and keeping the ads running just to get more customers in their doors. The January earnings report will set things straight.

On another note, I believe Apple will not only see all-time highs next year. It will see significantly higher highs. I expect almost $60 in earnings through next October. Applying even a very low P/E of 13.0x here gets you to $780. A 15.0x P/E gets you to $900. I think most investors will look back and say “it was such an obvious buy at $500… how did I miss it?”