Technical Analysis


Apple: An Inflection Point

April 12, 2016

Shares of Apple have spent the last 10 days consolidating just under the 200 day moving average. As we outlined in our early March post on the fundamental side (Apple: EPS Growth to Resume this Summer), we perceive the highest risk in shares is to the upside. Let’s take a close look at the near-term trends and work our way out to the longer-term price action.

200 DAY MOVING AVERAGE. Apple has been consolidating at the 200dma for two weeks. During the entire rally from early February, it established a trend of gapping higher than consolidating for a few days before continuing. That may be exactly what we’re seeing here. RSI has back off from very elevated levels, and shares have largely remained above the 8ema, which we view as the near-term trend signal.

AAPL 200dma

NEAR-TERM BULL FLAG. Here is a closer look at the full flag consolidation that shares have formed. The upper trend line is sitting essentially right at the 200dma. Shares have rallied strongly over the previous several weeks and it’s not uncommon for a brief period of consolidation before moving higher. As long as it keeps its support at the $108 level, the path of least resistance is up.

AAPL ST

ESTABLISHED DOWNTREND. Since its peak in July 2015, shares have formed a downtrend. Interestingly, this downtrend line is sitting squarely at several crucial resistance levels. The first is the blue downtrend line itself. The second is the 200dma (not shown on this chart; see above). The third is the 50% Fibonacci retracement level of the entire correction since mid-2015. A break out from the bull flag would also pierce through all of these resistance levels that sit at the $110-$111 levels. It’s relatively clear air up to $120 above that.

AAPL Downtrend

START OF A NEW UPTREND? Clearly Apple has been in a sustained downtrend since mid-2015. A downtrend is defined as a series of lower highs and lower lows. You can see that beginning in late May 2015. However, the tide looks to be turning here. In January, Apple wasn’t able to achieve a lower low compared to the price seen in August 2015. That is beginning to look suspiciously like a higher low. Just the opposite of a downtrend, an uptrend is defined as a series of higher highs and lower lows. Therefore, if Apple is able to achieve a higher high (above the $123 level), it will objectively be in an established uptrend.

It’s also important to know how crucial the 25ema has been in signaling a shift in trend. See each of the blue inflection points marked on the chart.

AAPL Weekly Uptrend

25 EXPONENTIAL MOVING AVERAGE. We briefly mentioned the 25ema in the up/down trend analysis above. But this one deserves some more attention. Notice how each sustained correction is marked by three important attributes. The first is a several month period below the 25ema. The second is sustained bearish RSI (area highlighted in red). The third is a touch of the 0%BB (touch of the lower Bollinger Band on the weekly chart).

Before this most recent correction, there have been four cases over the past ten years that fit this bill. In each case, the shares crossed back over the 25ema at the same time the RSI crossed back into the green (bull) area above the 50 level. In each case there was a 16-30% gain in just the next 8 weeks. Shares were recovering from severely oversold conditions. This past November, shares looked poised to see the same strong run, but the rally failed. How will shares handle it this time?

Weekly 25ema

LONG-TERM TRENDS. The 8ema on the monthly chart is extremely telling, too. Above that line, shares are in rally mode. Below it, they are in correction. It’s almost clear as day. You can also see either a rounding or double bottom in each case. Of the three severe corrections in the past ten years (not counting the most recent one), shares have spiked 13-23% in the month following a cross back above the 8ema, and have continued to rally for several months. That’s where we stand today.

AAPL Monthly 8ema

 


Apple: EPS Growth to Resume this Summer

March 1, 2016

We expect Apple to report the first decrease in LTM (prior four quarters) EPS for the March quarter since the middle of 2013.  The last time EPS saw a decline, shares priced in that decline roughly six months beforehand; likewise, just about six months before it reported a return to earnings growth, shares began to rally.

We saw the same thing this time around. Share price peaked in April, several months before it became clear that the holiday 2015 numbers would not be as stellar as anticipated. Now the big question is when will Apple return to earnings growth? We expect the June quarter to begin that trend, followed by significant jumps in EPS during the September 2016 and March 2017 quarters. If that’s the case, investors should begin to reprice shares over the coming weeks.

AAPL - 2.29 EPS Growth

Additionally, shares of Apple have respected one of the most important technical indicators out there. The Fibonacci levels are crucial here. During the 2012 “crash” in Apple stock, the shares respected and held the 50% Fibonacci retracement level (measuring the beginning of the rally in 2009 to the Sept 2012 top). Likewise, Apple has held that 50% retracement level from the 2013 trough to the April 2015 highs. Our thesis is that the confluence of this event in combination with the fundamental picture are aligning for a positive 2016.

AAPL LT

Lastly, the Bollinger Bands on the daily chart are as tight as they’ve ever been (less than $5 width). This is significant, as the BBands represent not one, but two standard deviations from the 20DMA. When this happens, we tend to see an explosive move in the near-term in the magnitude of 7-10%. It’s interesting to note that AAPL is bumping right up against the 50MA right now. A break above that level, which it hasn’t traded above in almost 3 months, is likely to cause a big move.


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


Speculation: The Excesses of AMZN

NOVEMBER 4, 2015

Shares of Amazon have surged well over 120% in just the last ten months. It’s rarely our philosophy to bet against a trend, and it’s almost never a profitable endeavor. Nonetheless, it’s hard to ignore the similarities between the current price action in Amazon and the “blow-off top” that Apple created in 2012.

BUMP AND RUN REVERSAL (BARR) is a reversal pattern that is designed to identify speculative advances that are unsustainable for a long period. There are three main phases to this pattern:

  1. Lead-In Phase. The first phase forms the basis from which to draw the trend line. During this phase, prices advance in an orderly manner and there is no speculation.
  2. Bump Phase. The “bump” forms as shares sharply advance, with prices moving further away from the lead-in trend line. The angle is typically 50% greater than the angle of the lead-in trend line. It is important that the bump represent a speculative advance that cannot be sustained for a long period. To validate the level of speculation, the distance from the highest high of the bump to the lead-in trend line should be at least twice the distance from the highest high in the lead-in phase.
  3. Run Phase. After speculation dies down, prices begin to peak and form a topping pattern. The “run” phase really begins when the pattern breaks the trend line support. Once the break occurs, the run phase takes over and the decline continues. Since prices rise very fast to form the bump, the subsequent decline can be just as ferocious.

Apple in 2012: An Example. From 2009 – 2012, shares of Apple formed a well-defined uptrend (lead-in) that was tested and held as support on multiple occasions. In early 2012, price began to expand exceptionally fast, just about doubling by September ($50 to $95). By September, shares had formed a significantly steeper “bump” trend line and had also created a negative RSI divergence – meaning a higher high in share price with a lower high on the RSI (a measure of momentum). Once the “bump” trend line broke, shares fell in an almost unbelievably dramatic fashion, losing nearly 50% of its value in just six months.

AAPL

Amazon in 2015. Shares of Amazon formed a very well-defined uptrend over the course of six years, with multiple tests of the trend line. In early 2015, shares began to speed higher. Price hit $290 in January, and this morning touched the $646 level – a 125% increase in just nine months. Similar to Apple, price has formed another much steeper “bump” trend line and has now formed a potential negative divergence with RSI (higher high in price with lower high in RSI). Now, we say potential because a reversal has not yet occurred. It is possible that share price continues to accelerate higher and actually reach a higher RSI level.

AMZN

The level of speculation and bullish energy in Amazon right now is clear everywhere you look. From a fundamental standpoint, shares are trading at a 930x PE (yes… 72x Apple’s PE and even 26x Google’s PE). That often gets explained away as “they’re reinvesting in the business”. Even Stanley Drunkenmiller yesterday said that Amazon is a great buy because Jeff Bezos is a “serial monopolist.” But that’s not the point. The fundamentals are often lead by the technicals. In fact, during Apple’s peak, we saw the same type of investor sentiment. The iPhone 5 had just been released and Apple could do no wrong. But it’s decline in share price forecasted declining EPS roughly six months before it was actually reported in their quarterly earnings.

We are not involved in this name yet. Once (we should really say “if”) shares do end up forming a topping pattern in the next several weeks, it may prove to be a uniquely profitable trade on the bearish side for 2016.