$AAPL Looks Like Another “Buy the Dip”

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!

Apple Second (Fiscal) Quarter Earnings

April 26, 2015

It’s been roughly six weeks since our last post (Thinking About Risk/Reward), in which we detailed our rationale for staying out of the market while we wait for a clear opportunity to present itself. Since then, we’ve taken a couple of swings at the $TQQQ – a leveraged bull ETF tracking the NASDAQ – as it retook the 10 and 50 day moving averages. Aside from that, we’ve been primarily in cash… waiting for the right opportunity to deploy it.

Discipline is the number one rule in investing. Entering and exiting positions based on emotions is an absolute killer. That’s why we’re waiting for Apple to report earnings before entering a position. Here’s what we expect tomorrow:

AAPL 2Q15 Estimate 2.18.2015

We expect China Mobile to add significant velocity to the iPhone business during the first three months of 2015, boosting top line revenues well above management guidance. iPads are likely to disappoint in our view, and will continue that trend for the foreseeable future.

We will most likely re-enter bullish AAPL positions on Tuesday *if*

  • They report north of $8.00 in LTM EPS,
  • Guidance comes in north of $46 billion for the third quarter,
  • The capital plan expected to be unveiled tomorrow satisfies the street, and
  • Most importantly: the chart and technicals react well.

Looking forward to the report tomorrow. We will unveil our 2015 full year estimates tomorrow. Many are discounting the Apple Watch, but it could be a significant driver of supplemental revenues / earnings in the quarters to come.

Thinking About Risk / Reward

March 14, 2015

“Every once in a while go to cash, take a break; don’t try to play the market all the time.” – Jesse Livermore. Deciding not to trade is sometimes the best decision a trader can make. That’s especially true after a string of winning trades, at the point when our ego’s grow and we think we’re better than we really are.

For the last three weeks, we’ve largely been sitting on our hands. As we detailed via our blog posts ($AAPL in 2015) and twitter, we allocated significant capital to AAPL positions in the $106-$109 range in mid-January. We sold those positions four weeks later in the $128.60 – $129.40 range for a variety of reasons, detailed in our post.


As you can see in the annotated chart above, we didn’t catch the exact top – we were $3 short. Similarly in late November, we exited at $116 after a significant rally from our $102 entry. That was, again, $3-$4 below the top tick. What do these have in common?

In both cases, we entered the positions as the risk/reward was skewed strongly towards “reward”. The downside risk was significantly lower than the upside risk (of course we had stops in case we were wrong). But as shares reached our target price, the risk/reward was no longer skewed toward “reward”. At that point, it was at best a 50/50 trade. And why participate in a trade or investment that is a 50/50 venture? We want the odds to be skewed in our favor. And we’ve learned that the next low-risk entry is always just a few days or a few weeks ahead.

There are two ways to react to price hitting your target. Either (a) exit the position, or (b) continue raising your trailing stop until the position is stopped out. We took the former approach with these trades. And interestingly, we took a lot of flak for selling when we did. There were a number of surprised and sometimes angry messages when we closed our positions. “How could you exit here?? The rally is just beginning!”

What the people making those comments fail to understand is that we don’t care if we miss out on part of the rally and the stock continues to run higher. In our eyes, the meat of the rally had already taken place. We almost doubled the value of our portfolio with the one-month Apple trade and have been sitting primarily in cash for the past three weeks. We can’t say we’ve totally resisted taking some small trades; but for better or worse, we’ve been stopped out of almost all of them with small losses.

It has proven to be a very good time to be sitting in cash (as long as it’s US dollar-denominated!). Not only have the equity markets stalled over the past two weeks, but the dollar has been raging higher at the expense of almost all other currencies. Turns out that our “investment” in the US dollar has been a solid store of value, as our purchasing power continues to increase as the dollar increases in value and stocks continue to pull back. But as always, we’re on the lookout for the next low risk / high reward entry opportunity.

Two Minute Drill

February 10, 2015

Want to quickly run through some charts we’re watching, many of which are actionable. In no particular order…

SPY (S&P500). After six weeks of consolidation between $199-$206, it is beginning to feel like the bulls are taking control. In this market, we often see an initial false move (either a false breakdown or breakout). But two false moves is less rationale. That’s because a false move is essentially an accumulation strategy by large investors. It allows them to sweep the stops that are in place. For instance, if they want to accumulate longs, they shake out traders who have sell stops in below the current range (i.e. the $198 level on Feb 1). What we labeled as “False Breakout” on February 6 was, instead, more likely an indication of the true move. We’re seeing follow through now.


SPY (S&P500 #2). Additionally, if you look at the daily SPY chart below, it’s clear that the bulls have actually been in control during this entire consolidation. It hasn’t felt like it… but price has remained above the 38.2% Fibonacci retacement level from the October lows to the December highs. That retracement level also happened to rest at the rising channel support level (funny how technicals tend to converge at certain support/resistance levels). Further, price finally broke above – and re-tested – the January downtrend line. Things seem to be turning around.


AAPL (Apple). As we detailed in our AAPL post yesterday, shares formed a relatively well-defined cup and handle pattern. Today, shares broke through and powered higher. Remember that shares may always re-test a significant support/resistance level. We wouldn’t be surprised to see shares revisit the $120 level and bounce higher. But we do expect that shares will be significantly higher in the coming weeks and 2-3 months.


IWC (Microcaps). The microcap index has formed a very nice inverted head and shoulders pattern. After an initial breakout that found resistance exactly at the 38.2% Fibonacci extension level, the IWC re-tested its breakout level and has largely held the $74-75 support. We do expect higher prices in the weeks and months ahead.


QQQ (Nasdaq). The QQQ’s have formed a ten week triangle consolidation pattern with very well-defined support at $99.50 and resistance found at the descending trend line. For the first time during those ten weeks, the index has peaked its head above the downtrend line. With the broader markets (SPY, IWC above) showing a bullish turn, we expect the QQQ to do the same.


TSLA (Tesla). We’ve written detailed posts explaining our bearish sentiments on TSLA. We went short at 220 in early January and covered in the low 190’s. Instead of short and hold, we’ve been opportunistically entering quick short trades. As shares re-tested the 200MA this past week, we re-entered that position with a stop above the MA.


TSLA (Tesla #2). Additional support for our bearish thesis is illustrated with the 40MA on the weekly chart. It’s clear that this is a significant moving average to watch – it defined the exact lows through 2013 and 2014; it also defined the exact resistance in December and again this last week. A close above this would negate our bearish thesis.


TWTR (Twitter). We took a small long position as shares reclaimed the 200MA the day of earnings. That was a signal that investors were showing their hand early. During the post-earnings rally, shares found resistance at the 61.8% Fibonacci retracement of the October high – December low. Today, TWTR found support at the 50% Fib level. We continue to hold our long position and will exit with a close below today’s low.


YHOO (Yahoo). Shares of Yahoo have gotten crushed since earnings. We had expected that the 38.2% Fib level would hold, but clearly it did not. Instead, the 61.8% Fib level was tested after earnings (and has since held). Depending on your view here, it might be a decent risk/reward. With the 200MA less than 2 points below current prices, there’s a lot of support in this zone. Just remember to have stops set.


FAS (Financial 3x Index). During the recent spike in volatility, financials were hit hard. The 3x financial bull index formed a double bottom with a neckline that sat directly at the 50MA. We love when these support/resistance levels converge, because it makes a breakout that much more meaningful. The target on this breakout just happens to coincide with the recent all-time highs at $132.50.


GM (General Motors). As we explained in a post before earnings, we entered bullish positions as shares broke above the $33.50 level. At that level, the 10, 50 and 200MA’s all converged. Clearly, a break above that level is a very meaningful. Funny how technicals often lead fundamentals. The earnings report was solid and shares spiked. We exited our position as it nears its $39 target. Might be time for a breather, but definitely not a short here.


GS (Goldman Sachs). Just like the financial index above, GS formed a double bottom at $172.50 and just broke above the neckline at $182.50. However, the 50MA sits 2 points above current prices, which may be resistance. If shares do break through the 50MA, we will likely enter intermediate-term positions. But the risk/reward is simply too high until it re-takes that resistance level.


GOOGL (Google). We wrote a detailed post on GOOGL and explained why shares were likely to find resistance at the $490 level. We exited two weeks later at $530 (50MA at the time). While shares did continue to the upside, we have to remember that we don’t need to catch the entire move. In fact, we should NOT try to catch the entire move. That level of greed leads to bad decisions. Know at what level it will be “enough”, that you’ll be proven right and that you’ll have a profit that you are happy with. Back to the charts… GOOGL has formed an inverted head and shoulders pattern. However, the 200MA sits just 10 points above the neckline, which makes for a tough decision. We’ll wait for the 200MA to be retaken before entering any other long positions.


GOOGL (Google #2). We posted the chart below as one piece of our bullish thesis on GOOGL while shares were sitting at the $490 level. It bounced off that level again. This is one to watch…


NFLX (Netflix). Shares of Netflix are forming a bull pennant after skyrocketing on a nice earnings report. This one could be headed to all-time highs. RSI has backed off overbought levels, leaving additional room to the upside.


$GM: Good Times Ahead

February 3, 2015

Shares of GM have formed a relatively well-defined inverted head and shoulders pattern. The neckline has been tested no less than six times in as many months and there is a clear low (August), lower low (October), and a higher low (December). All the recipes to satisfy a head and shoulders bottoming formation.

Significantly, in the current market, we really need to see not only pattern confirmation, but also a validated re-test. We saw that in January as shares re-tested the neckline. While they did briefly fall below the neckline, the current market has been all about false moves – whether they be false breakouts or false breakdowns.

Additionally, the neckline happened to rest at almost precisely the 200MA and 50MA. All very important levels. And the MACD on the daily chart is curling up as well. We believe shares will be significantly higher in the months ahead. This is supported by fundamentals as well, as the severe drop in oil prices allow the company to regain its competitive edge against transportation options that use alternative forms of energy. Shares could see the $39-40 level before summer.