October 26, 2013 (3:30 pm)
Heading into earnings on Monday afternoon, we wanted to provide an update on Apple’s recent stock price action. Since early July, the stock has gained almost $140 points – $130 of which have come since just the last earnings announcement.
COMPARISON TO JULY-SEPT 2011. We’ve posted the following chart a number of times. We first noticed a few similarities back in late September (A Complete Look at Apple and the Markets). The recent action has followed an eerily similar set of price movements.
During both the July-Sept 2011 and July-Oct 2013 patterns, it all starts with a meteoric rise from Point (1) to Point (4), with consolidation along the 50DMA at Points (2) and (3) along the way. After hitting Point (4), the shares retraced approximately 50% of their gains back down to Point (5) at the 50DMA. Consolidation for a few weeks followed, as the shares slowly rode up the 50 DMA line before exploding past their previous high to Point (7). We find ourselves at Point (7) right now – just as we head into 4Q13 earnings.
It’s no coincidence that other technical indicators, namely the MACD and RSI, share very similar attributes between those two periods in 2011 and 2013 as well. At the initial low Point (1) the MACD makes a bullish flip, and at the Point (4) high, it flips to bearish (at roughly the same levels). After the pullback, the MACD consolidates for a number of weeks. Take a look at the RSI in that same chart. Notice how similar the each point is between the 2011 and 2013 time frames.
NEGATIVE DIVERGENCE. Significantly, the RSI is also painting an extremely bearish picture for the near term. It has created multi-month negative divergence – forming a lower high on RSI while prices have risen (red lines in the chart below). This is a sign that momentum has weakened and portends a pullback.
At the bottom of this chart, you’ll see the Chaiken Money Flow – which has risen substantially in the past couple of weeks. Money is flowing into the name (which shouldn’t be surprising given its rally). However, note that it also rose to this same level (Point 7) during the peak of the 2011 rally.
DOUBLE BOTTOM. As we’ve shown many times, $545 is the target level to be reached from the double bottom breakout. We’ve reached within 10 points of that level.
CUP & HANDLE. The current Apple chart forms a very well-defined cup and handle pattern. This is a longer-term chart that we’ll continue to keep a close eye on.
CONCLUSION. So how do we piece this all together? We expect to see a near-term pullback in shares of Apple due to:
- Bearish RSI negative divergence
- Reaching very near the double bottom target
- Spending numerous days above the upper Bollinger Band
- Comparison to 2011
- Shares already up $130 from the previous earnings announcement
That last point is an important one to keep in mind. Shares of Apple have rallied from $400 to $530 since the July earnings report. When Apple see a significant rally into earnings, we tend to see a decline either on or following the earnings report. All of those factors, together, gave us the confidence to largely exit our entire Apple stake heading into earnings (which we did on Friday). Maybe the shares gap up and continue rallying, against all historical norms. But we’re comfortable waiting for a better opportunity at this point.
LONGER-TERM THOUGHTS. There are really two scenarios here. Our current expectation is for a pullback in shares over the coming weeks. If this comes to fruition, we’d expect to see a major rally into the Holidays and through the first quarter of 2014. In other words, we’d expect the similarities to the 2011 pattern to continue. From a fundamental point of view, we currently expect 25% EPS growth year-over-year in fiscal 2014. That growth, along with weaker comps, a potential deal with China Mobile, stellar iPhone/iPad sales in the coming quarter, and the possibility for a new product category (none of which are included in our EPS estimates currently) should drive institutional interest in shares through 2014. That Cup and Handle target of $645 will be an important one to watch as we move forward… it could be hit sooner than many believe. But shares do need to consolidate/pullback first.
If, on the other hand, the shares spike on the earnings report and continue to run, we will have to reassess our view. Apple doesn’t historically move up or down slowly. It makes epic runs and falls, and largely consolidates in between. Therefore, if it continues to run, we’d expect it to experience a longer than usual period of consolidation during which we can trade the name.