July 10, 2015
Wanted to get to this last night, but didn’t have time. We posted on twitter yesterday a number of Apple and broader market charts heading into the close. We will summarize and expand on those here. For Intermediate- and longer-term investors, this looks like a good time to increase exposure to AAPL.
Shares of Apple have been consolidating since late February. We explained in our February 17 post (AAPL in 2015) that we were selling our AAPL holdings at the $129.50 level for a variety of technical reasons. We followed up in the middle of March and detailed our thoughts on risk/reward and why it’s advantageous to, from time to time, sell even those stocks you believe have fundamentals on their side (Thinking About Risk / Reward). It appears as though the consolidation phase has run it’s course… Apple may be about to experience another leg higher.
AAPL: 34 WEEK MOVING AVERAGE. As you can see in the chart below, the 34 week moving average has consistently been one of the most accurate support and resistance levels for AAPL. It acted as firm support in 2010-2011, then exact resistance during the downturn of late 2012. Since breaking back through in 2013, it has acted as almost exact support. Yesterday, shares again tagged this important level. In our view, it’s not important that shares slid below the $121.85 level for a number of hours in a single day; what’s important is that prices below that level were firmly rejected the following day. On a whole, investors were not sellers below that level – they were buyers.
AAPL: 200 DMA / 30 RSI / $119 PRIOR RESISTANCE. Shares of Apple tagged three other significant levels yesterday. The first was the 200 day moving average. Like the 34 week, this moving average has historically acted as a strong point of support and resistance, only breaking below it once during the late 2012 crash.
The second indicator is the 30 RSI level. This level tends to put in a bottom for shares. Interestingly, and aside from the late 2012 crash, any time the 30 RSI level and 200 DMA were tagged at the same time (green lines below), shares of AAPL bottomed and almost immediately rallied significantly. Over the following 2-3 weeks, RSI rose back to the 70-80 level, and prices below the 200 DMA were firmly rejected.
Shaded in light gray, the $119 level at which the 30 RSI and 200 DMA sat yesterday also marked the highs from the November 2014 rally, which was subsequently tested in March 2015 (where it found support). With all of these indicators lining up, we came to the conclusion that, barring an all-out correction across the global equity markets, shares of AAPL are due to rally. And with earnings coming up the week after next – our base case EPS is $0.20 above consensus – we continue to expect higher prices ahead.
PUT/CALL RATIO. We mentioned above that we expect AAPL to rally unless there is a significant correction in the global equity markets. So… what if there is? There are two indicators we constantly watch in order to assess the likelihood of just that scenario. The first is the $CPC put/call ratio below. Each time the moving average hits the 1.1 level, it has marked the bottom of the correction in the equity markets. This indicator is a fear gauge… investors load up on puts when they’re fearful of lower prices. Fear is typically highest near the bottom after a correction has already taken place.
VOLATILITY. Most traders and investors know the “VIX”, which represents the 30-day volatility index. Typically, volatility rises as the market pulls back and falls when the market gains strength. This is why it’s called the fear index. The less familiar “VXV” measures the next 3 months’ volatility. Just like one expects an option with more time value to trade at a higher price, one would expect the VXV (3 month) to trade at a higher price that VIX (30 day). However, in times of great fear, the VIX trades above the VXV – i.e.fear in the near-term explodes. In the chart below, we’ve shaded those instances when this occurred. Over the last two years, it has coincided with a bottom in the equity markets.
CONCLUSION. There may yet be heightened volatility in the near-term due to widely discussed problems around the world – Greece, China’s stock market, etc. But we expect that shares of AAPL will be significantly higher in the intermediate-term given the above indications. As always, it’s crucial not to simply rest on an analysis from one day. We will continue to watch the charts – if shares see a sustained drop below the 200 DMA, we will be stopped out of our positions and look for another entry point in the future. We’ll post our expectations for Apple’s upcoming earnings next week. Have a great weekend!