Oversold


All Eyes on Apple

JANUARY 26, 2016

Few things are as frustrating as when well-known investment professionals act absolutely certain of a specific future outcome. It’s irresponsible as a fiduciary to one’s clients. And, just as important in our eyes, instead of trying to educate the public, it’s simply fanning the flames already burning wildly. This morning, Dennis Gartman proclaimed that “crude oil will never trade back above $44 in my lifetime.” Sure it won’t, Dennis.

Nor will Apple be able to continue its success. If you’ve been reading the press and analyst reports, it is abundantly clear that Apple’s best days are behind it. Just as the oil-trade has become almost entirely one-sided (my family and friends who tangentially follow the markets just “know” it will continue lower), so has the Apple trade. The iPhone business has peaked. The Watch is a huge disappointment. The iPad has little potential to expand. The Car is DOA.

Forget the narrative. Since when has it worked in this company’s favor anyways? The cycle has become incredibly consistent. When everyone agrees with the growth story, shares tend to top out. And when everyone agrees that the upside is limited and the company has peaked, shares tend to be in the final stage of a bottoming process.

A REPLAY OF 2013. Last week as AAPL quickly descended to re-test the August capitulation lows, we released the chart below. There are so many interesting correlations to consider.

First, for a multi-month period during 2012, shares formed a head-and-shoulders topping pattern. When it broke down from that topping pattern, it experienced a dramatic 25% drop in a short amount of time. After bottoming near long-term support (the $51-$54 range established before its huge run-up), it tested and then re-tested the 100 DMA. The week before a crucial July earnings report, shares re-tested the lows at $53, then rallied to the 20 MA level into the earnings announcement.

AAPL

Fast forward to today. We can really just cut and paste from the section above. For a multi-month period during 2015, shares formed a head-and-shoulders topping pattern. When it broke down from that topping pattern, it experienced a dramatic 25% drop in a very short timeframe. After bottoming near long-term support (near $94, the previous all-time high), it tested and then re-tested the 100 DMA. The week before a crucial January earnings report, shares retested the lows at $93, then rallied to the 20 MA level into the earnings announcement.

  • A secondary observation is that the RSI levels during the initial bottom, test of the 100 DMA, and re-test of the bottom all occurred almost precisely at the 25, 70 and 25 RSI levels.
  • A final observation is that each time over the past five years that the MACD dropped to a -4, shares of AAPL rallied between 17%-19% in just a few days. It did so again last week. That equates to $110 after earnings, which interestingly is almost exactly at the 50 MA.

The question of the quarter is, will this double bottom hold as it did in 2013? If shares do break upward after earnings, the pattern will continue to look an awful lot like July 2013 with a strong double bottom possibility. That said, a double bottom is not confirmed until/unless the $125 level is definitively broken.

FIBONACCI SUPPORT. A completely independent piece of evidence that AAPL may be bottoming is found in the Fibs (i.e. Fibonacci levels).

After the 2009 bottom, shares of AAPL climbed consistently for almost three and a half years. When shares did fall back during the 2012/2013 “Apple crash”, it found both initial support (capitulation bottom) and final support (double bottom) almost exactly at the 50% Fibonacci retracement of that entire 2009-2012 run-up. From the lows of 2013, shares of AAPL climbed for another two years. It found initial support (capitulation bottom) and a secondary support (potential double bottom) almost exactly at the 50% Fibonacci retracement of the 2013-2015 run-up.

AAPL Fib

All eyes will be on AAPL this afternoon. Don’t be surprised to see the shares become extremely volatile into the close. Notice that we have made no claims to be certain about the future price action. Based on the price action and technical evidence before us, we expect that the likelier possibility is for shares to be in the late stages of a bottoming process. But there can never be absolute certainty in the investing and trading process. A truly riskless investment does not exist in the equity markets; but by accumulating independent pieces of evidence, you can shift the odds in your favor.

FUNDAMENTALS. A quick rundown of our estimates and March guidance are below:

  • Revenues: $77.7 billion;
  • EPS: $3.37 ($9.51 LTM / 10.5x PE at the current price);
  • iPhones: 81.5 million @ $660 ASP
  • iPads: 14.5 million @ $420 ASP
  • Macs: 5.75 million @ $1,250 ASP
  • Watches: 6.5 million @ $446 ASP
  • GM: 40.0%

Guidance will be very important. The general consensus among analysts is that Apple will report at or just below its top end of guidance for the December quarter (we’re slightly above that). However, there is a considerably large range for the March quarter. We’re currently at 63.5 million iPhones, which we view as conservative representing less than 4% YOY growth, and gross revenues of $60.7 billion, less than 5% higher than the year ago quarter. If the revenue guidance mid-point is around the $57.5 billion area, our expectation will be confirmed.


Oil: Signs of a Bottom

December 10, 2015

As we reviewed the oil charts this morning, it became apparent that many technical factors are beginning to align that may give the bulls some room to run. The “Drudge Indicator” is flashing, and the general population has a suddenly expansive knowledge and understanding of the oil economy and its underlying supply and demand trends. As any family member can tell you over the holidays, Saudi Arabia will continue to flood the market until all others have gone bankrupt, and oil will of course trade down to the $20’s. Right. We all know how things like this tend to play out once the direction is “absolute” and “clear”.

The three charts below of WTIC (spot price of light crude oil), USO (oil ETF) and UCO (2x oil ETF) all show the same thing. Not a surprise, since they’re based on the same underlying asset. But it’s important to review them individually for clues. What you’ll see is the following. The volume has absolutely skyrocketed during 2015 and shares have formed a falling wedge pattern (generally bullish, as new lows become less and less pronounced). And that comes while price is showing massive positive divergence from RSI and MACD. What that means is that price is forming lower lows while the technical momentum indicators are forming higher lows. The downward momentum is slowing. This, along with the massive volume into the lows, may be a sign of some serious accumulation by the largest institutional investors into the asset class.

UCO (ProShares Ultra Crude Oil)

UCO

USO (US Oil Fund)

USO

WTIC (Spot Price of Light Crude Oil)

WTIC


Is Santa On His Way?

December 16, 2014

With all the pessimism over the past few days, it’s hard to see past the gloomy winter skies. But signs are starting to emerge that lead us to believe the Santa Rally is on its way… and soon.

S&P 500 (SPX) – The Wedge. We’ve been watching this chart for what seems like forever. And it’s continued to work well. The two converging trend lines are crucially important, and were only breached on one occasion (at the peak of the correction this October). Further, the 34 week moving average has been a significant support/resistance level.

SPX LT

S&P 500 (SPY) – Support. Looking more closely at the SPY, there’s strong support at the $198 level – just $1.50 below the current level. Further, the RSI is hitting oversold levels that have historically acted as solid buying opportunities. While many are worried of a straight drop similar to October 1987, the SPY created a higher high (in fact, the highest high) just last week. Before a more significant correction, all probabilities point to seeing a lower high develop, i.e. a re-test of the $206-$208 level.

SPY

VOLATILITY (VIX) – Topping Out. This chart has been a profitable one to follow. When the $VIX hits the 70 RSI level and jumps out of the top BBand, it has acted as strong support for the SPY. It is essentially signaling that capitulation is taking place and investors are dumping shares in fear of a steeper correction. Even in those instances it has “failed” (red arrows along the bottom), an investable bottom has been found within just a few SPY points. We believe the $198-$199 level will see strong support. If we do get down to that level tomorrow and the VIX continues to spike, we’ll likely be taking advantage of that early holiday gift.

VIX

TREASURIES (TLT) – Topping Out. Similar to the VIX, the treasury ETF (TLT) tends to act inversely to the equity market. As fear rises in the equity markets, investors flee to the safety of treasury bonds. The TLT has formed a really well-defined rising channel over the past 18 months. Shares of TLT recently breached the channel; it has also hit an RSI level that has historically led to pullbacks in the past. It’s likely topping out at this level, which means that investor fear will fall and equity markets should bounce.

TLT

APPLE (AAPL). Shares of AAPL have formed a well-defined rising channel. Each hit of the top trend line has preceded a pullback; likewise, each touch of the bottom trend has led to a bounce. In a previous post two weeks ago, we argued that AAPL was topping in the 116-120 area (and sold calls at that level). The risk/reward has now shifted. We believe the $103 area will be strong support right at the bottom trend line, and it also coincides with the top of the two month triangle formed in Aug-Oct. While there is likely $5 of downside risk, there’s roughly $12-$15 of upside risk back to the top of the channel and all-time highs. Wouldn’t be surprised to see a bounce off the 50 DMA right around currently levels.

AAPL

AAPL has also formed a bullish falling wedge pattern. We saw a false breakdown today with shares dropping below $107.50, but they recovered and closed back within the wedge. This type of action often precedes a breakout in the opposite direction. With every piece of news around Apple being very strong for long-term fundamentals, wouldn’t be at all surprised to see a re-test of the highs going into its earnings in just a few weeks.

AAPL Wedge

ENERGY SELECT ETF (XLE). We posted the chart below several weeks ago, just as the XLE was bottoming in October. Based on historical comparisons, we expected shares to see a Fibonacci retracement of between 38.2%-50% within six weeks (which we exactly saw) followed by a re-test of the lows (which we’re seeing now). Each time the shares have seen a mid-teens RSI, it has followed the same pattern. At this point, we expect shares to rebound to the previous consolidation area ($84-$86) within several weeks.

XLE

EXXON MOBIL (XOM). Shares of XOM have formed a crystal clear, well-defined head and shoulders pattern. In fact, it’s one of the sharpest H&S patterns we’ve seen in a long time. A perfect neckline that has acted as strong support, shoulders around the same level that lasted the same length of time. Picture perfect. However, it’s our expectation that this is a bear trap. With the broader markets, and the energy sector more specifically, showing signs of bottoming, this is likely a good opportunity to pick up XOM near the year’s lows with a well defined exit point.

XOM

CORN. Shares of CORN have formed another well-defined inverse head and shoulders pattern. It looks like this has at least $3-$4 to the upside over the next few months.

CORN


A Review of Our June Expectations

September 24, 2013 (6:15 pm)

After writing a post on June 20 (see the post here), we took a three-month break from updating this site. We continued to provide charts to our Twitter followers, but largely strayed from the larger, more complex analysis that is impossible to conduct in 140 characters. So we wanted to review our last comprehensive analysis on Apple and the broader markets.

***FROM JUNE 20*** Heading into its WWDC, we laid out three charts with explanations as to why we believed shares of Apple would rise during and after the conference. The rising MACD and bounce off the 50DMA: wrong. The potential inverse head and shoulders: wrong. A bullish triangle on the weekly chart: wrong. Clearly, we were wrong on all fronts here, as the shares continued lower and reached as low as $408 this morning.

We believe the tide is turning, however. We’ll lay out a series of charts and historical comparisons as to why we remain bullish on the shares. Three28Capital does not recommend very near-term options plays – it’s simply gambling. But for those with an intermediate- to longer-term timeframe, we believe it’s a great opportunity to pick up shares or options in Apple at these levels. Here’s why:

1. Daily Chart: Bollinger Bands and RSI. The chart below is, in our opinion, the most powerful and meaningful of the charts we’ll explore. First, the daily RSI support (horizontal blue line) has been an extremely accurate indicator. The RSI is now sitting firmly at that support. Second, a meaningful drop (not just a few cents, but multiple dollars) below the lower Bollinger Band has proven to be a very useful data point. Shares of Apple have traded well below the lower Bollinger Band for the past three days. You can see the reaction to either of these “buy” indicators on the chart below. Notice that when both indicators flash “buy” at the same time (which is the case today), we’ve seen the following rallies:

  • Jun 2011: $90 (one month)
  • May 2012: $55 (two weeks)
  • Jan 2013: $50 (two weeks)
  • Mar 2013: $50 (three weeks)
  • Apr 2013: $90 (three weeks)

AAPL BBands RSI

***SEPTEMBER 24 UPDATE***: Here is what the chart looks like today. Clearly, for those with “an intermediate- to longer-term timeframe”, our $408 recommendation price was a fantastic time to buy.

AAPL BB Update

***FROM JUNE 20*** 2. Hourly Chart: RSI. Since the September top in shares of Apple, the green and red horizontal RSI lines below have acted as very accurate buy and sell indicators. Shares are now trading below that important 20 RSI level. We expect a retracement of this pull-back over the coming days and weeks.

AAPL Hourly

3. Bollinger Band Compression: A Historical Comparison. We’d classify this one under the “interesting” category (and not necessarily, but potentially, meaningful). The last time the Bollinger Bands were as compressed as they got in early June (which was a width of $22.50) was – coincidentally – in early June 2011… just two days apart between the years. What’s interesting is to compare the subsequent price action. In June 2011, with the BBand width at just $21, the shares dropped nearly 6% over the coming 7 trading days, with capitulation selling to a level well below the lower BBand.

Contrast that action to today (note that the chart below was as of yesterday’s close). With the shares trading as low as $408 today, that denotes a 6% drop over the past 7 trading days. And don’t forget the capitulation selling we’ve seen today to a level well below the lower BBand. After that capitulation in June 2011, there was a dramatic rally of 30% over the following four weeks.

BB Comparison

***SEPTEMBER 24 UPDATE*** See an updated chart of the aftermath of the Bollinger Band compression below. Although there was some remaining downside pressure, the shares bounced over $100 from our recommendation price over the following 7 weeks.

AAPL BB Compression Update

***FROM JUNE 20*** 4. QQQ (NASDAQ) Long-Term Support. Another important data point when analyzing Apple is to consider the NASDAQ index (QQQ). The chart below is extremely important. With this (what feels like) capitulatory selling, the QQQ saw quick and intense selling almost in a vertical decline. It stopped right at the long-term support level that had marked two previous (and important) peaks over the past year. That support firmly held, and the QQQ’s have since held above that support. This is meaningful price action, and we expect a retracement of the pull-back to begin shortly.

QQQ

***SEPTEMBER 24 UPDATE*** Our thesis proved 100% correct. The QQQ held exactly at the long-term support line and a full retracement quickly ensued. See below for the updated chart. The index has gained 13% since our call of an imminent bottom.

QQQ Update

***FROM JUNE 20*** 5. VIX Buy Indicator. We’ve discussed this one multiple times. When the RSI on the VIX (general market volatility indicator) get up to the red horizontal line, it has historically acted as a very accurate “buy” indicator. It signals that the volatility and fear is reaching a peak, and that the market is likely to turn soon.

VIX

6. NYMO Extreme Low. When the NYMO hits the very overextended -80 level, we consider the “buy” signal to be met. With the continuation of the sell-off late this morning, we have no doubt that the already oversold NYMO is continuing lower (chart below from yesterday’s close). This is another important and accurate market “tell” that we watch on a weekly basis.

NYMO2

***SEPTEMBER 24 UPDATE*** As we had expected, since the NYMO has been such a reliable indicator, the broader market saw a strong rally after the oversold NYMO indicator.

NYMO


Apple: Is This Capitulation?

June 20, 2013 (1:15 pm)

Heading into its WWDC, we laid out three charts with explanations as to why we believed shares of Apple would rise during and after the conference. The rising MACD and bounce off the 50DMA: wrong. The potential inverse head and shoulders: wrong. A bullish triangle on the weekly chart: wrong. Clearly, we were wrong on all fronts here, as the shares continued lower and reached as low as $408 this morning.

We believe the tide is turning, however. We’ll lay out a series of charts and historical comparisons as to why we remain bullish on the shares. Three28Capital does not recommend very near-term options plays – it’s simply gambling. But for those with an intermediate- to longer-term timeframe, we believe it’s a great opportunity to pick up shares or options in Apple at these levels. Here’s why:

1. Daily Chart: Bollinger Bands and RSI. The chart below is, in our opinion, the most powerful and meaningful of the charts we’ll explore. First, the daily RSI support (horizontal blue line) has been an extremely accurate indicator. The RSI is now sitting firmly at that support. Second, a meaningful drop (not just a few cents, but multiple dollars) below the lower Bollinger Band has proven to be a very useful data point. Shares of Apple have traded well below the lower Bollinger Band for the past three days. You can see the reaction to either of these “buy” indicators on the chart below. Notice that when both indicators flash “buy” at the same time (which is the case today), we’ve seen the following rallies:

  • Jun 2011: $90 (one month)
  • May 2012: $55 (two weeks)
  • Jan 2013: $50 (two weeks)
  • Mar 2013: $50 (three weeks)
  • Apr 2013: $90 (three weeks)

AAPL BBands RSI

2. Hourly Chart: RSI. Since the September top in shares of Apple, the green and red horizontal RSI lines below have acted as very accurate buy and sell indicators. Shares are now trading below that important 20 RSI level. We expect a retracement of this pull-back over the coming days and weeks.

AAPL Hourly

3. Bollinger Band Compression: A Historical Comparison. We’d classify this one under the “interesting” category (and not necessarily, but potentially, meaningful). The last time the Bollinger Bands were as compressed as they got in early June (which was a width of $22.50) was – coincidentally – in early June 2011… just two days apart between the years. What’s interesting is to compare the subsequent price action. In June 2011, with the BBand width at just $21, the shares dropped nearly 6% over the coming 7 trading days, with capitulation selling to a level well below the lower BBand.

Contrast that action to today (note that the chart below was as of yesterday’s close). With the shares trading as low as $408 today, that denotes a 6% drop over the past 7 trading days. And don’t forget the capitulation selling we’ve seen today to a level well below the lower BBand. After that capitulation in June 2011, there was a dramatic rally of 30% over the following four weeks.

BB Comparison

4. QQQ (NASDAQ) Long-Term Support. Another important data point when analyzing Apple is to consider the NASDAQ index (QQQ). The chart below is extremely important. With this (what feels like) capitulatory selling, the QQQ saw quick and intense selling almost in a vertical decline. It stopped right at the long-term support level that had marked two previous (and important) peaks over the past year. That support firmly held, and the QQQ’s have since held above that support. This is meaningful price action, and we expect a retracement of the pull-back to begin shortly.

QQQ

5. VIX Buy Indicator. We’ve discussed this one multiple times. When the RSI on the VIX (general market volatility indicator) get up to the red horizontal line, it has historically acted as a very accurate “buy” indicator. It signals that the volatility and fear is reaching a peak, and that the market is likely to turn soon.

VIX

6. NYMO Extreme Low. When the NYMO hits the very overextended -80 level, we consider the “buy” signal to be met. With the continuation of the sell-off late this morning, we have no doubt that the already oversold NYMO is continuing lower (chart below from yesterday’s close). This is another important and accurate market “tell” that we watch on a weekly basis.

NYMO2