$AAPL Earnings: Great Expectations

January 25, 2015

Apple’s fiscal Q1 earnings are set to be announced Tuesday after the close. We have high expectations – not only for the quarter behind us, but also for the quarter ahead.

As we laid out in our early January post on $AAPL in 2015, we expect shares to trade around the 15x-19x PE range for a majority of the year. A stock trades within a valuation range that is based entirely on expectations. Expectations on growth, expectations on stable or growing revenues, expectations for new products, expectations on margin… you get the point.

VALUATION RANGE. As illustrated in the chart below, Apple tends to trades within a PE range of roughly 5x PE for an 18-24 month period. The valuation range shifts over time as the fundamentals of the business and investor expectations change. For the past six months, Apple has traded between a 15x-19x PE valuation. In our expectation, that range should stay in place as expectations for continued iPhone strength and a new product (Apple Watch) keep sentiment high.


UNIT SALES EXPECTATIONS. We expect Apple to deliver very strong earnings for the December quarter on an absolute basis, but also (and even more importantly) on a year-over-year basis. Our PE valuation above is based on the last twelve months, or trailing, EPS. Assuming a constant PE range, earnings growth over the prior year is what boosts share price.

  • iPhone. We all know the story… Apple will sell more iPhone’s than it has ever sold by a huge margin. During the year ago quarter, Apple sold 51 million iPhones, which at the time was the most ever. We expect 69 million iPhone sales to be announced, a 35% YOY increase. That growth is driven by the popularity of the larger screen size (both the 6 and 6 Plus). Importantly, we also expect ASP’s to increase to $676, due to the shift in storage capacity along with the increased pricing of the 6 Plus.
  • iPad. We expect iPad sales remained elevated during the Christmas quarter, but believe a significant drop will occur without any serious structural improvements in the form factor. The iPhone 6 Plus, of which we expect roughly 14 million were sold last quarter, is absolutely taking share from iPad sales. We expect 20 million sales last quarter – a 23% drop year-over-year. We expect ASP’s to be relatively inline with last quarter, at $425.
  • Mac. We’re projecting 5.5 million Mac sales during the quarter – a 14% increase over last year and flat over last quarter. As we saw last year, we expect an increase in ASP to $1,300.
  • Other. We’re expecting a moderate increase in iTunes revenue to $4.8 billion and Accessories to come in at $2.25 billion (including roughly $250 million from Beats).

EARNINGS EXPECTATIONS. Based on our unit sales and ASP projections, we’re expecting $69.97 billion in revenues for the quarter, roughly 7.5% higher than the mid-point guidance provided by management. This leads us to an earnings per share estimate of $2.67. Apple’s LTM EPS would increase by $0.60 to $7.03 per share.

AAPL Earnings

GUIDANCE. We’re currently projecting $55 billion in revenues next quarter and gross margins of 38.6%. If management guides to a mid-point in the $53 billion range, we believe our current estimates will be relatively stable going into next quarter.

LOOKING AHEAD. Based on our valuation range and the new $7.03 earnings per share, we would expect shares of Apple to trade in a range between $106 and $134. This is one of the reasons we were increasing our long-term positions in Apple as shares hit $105 due to options expiration last Friday.

Looking ahead to Fiscal 2015 (ending Sept 2015), we have estimated relatively conservative assumptions and reached a LTM earnings number around the $8.50 level. This assumes a moderation in iPhone sales to 55 million next quarter, then 45 million and 42.5 million in the following two quarters. It assumes iPad sales struggle around the 10 million level over the next three-quarters, and between 4.75-5.25 million Mac’s sell each quarter. These are all highly defensible and, in our view, conservative numbers. We estimate 3.5 million Apple Watches are sold in the June quarter and 5 million are sold in the September quarter – again, conservative assumptions.

If our 15x-19x PE range thesis continues to hold, we would expect shares to trade in the $125-$155 range after September earnings are announced. The LTM EPS vs. Share Price chart below is supportive of the same fundamental story.


CHARTS: RISING CHANNEL. Apple twice re-tested the bottom trend line of its long-term rising channel over the past few weeks. It held and shares are now forming a longer-term bull flag. MACD is turning up and the RSI has plenty of room to the upside.


CHARTS: NEAR-TERM BOTTOMING PATTERN. Apple has formed a bottoming pattern over the past several weeks that can technically be interpreted as either a double bottom or an inverted head and shoulders. In either case, the target points to new all-time highs if shares are able to break through the $113 level. It’s also important to note that the 7 week downtrend line was broken late last week, easing the resistance to the upside.


$YHOO in the Weeks Ahead

January 20, 2015

During the upcoming $YHOO earnings report, we expect Marissa Mayer to detail how the company will deal with a pressing issue. How will they maximize the value of Yahoo’s exposure to Alibaba and Yahoo Japan? Their ability to deliver a tax-efficient structure could drive the next stage of growth in share price.


VALUATION. $YHOO is comprised of a variety of components – two of which are interests in public companies. A sum of the parts analysis allows us to look at the value of the individual components to derive the overall valuation of the broader company.


  • Net Cash. The simplest piece of this puzzle is valuing Yahoo’s current net cash position. This looks at total cash and marketable securities, less any outstanding debt. Per the Sept 30, 2014 financials, Yahoo has $3.9 billion in net cash. This excludes cash from the Alibaba IPO, as described below.


  • Yahoo HK Holdings (Cash from Alibaba IPO). Years ago, Jerry Yang acquired a significant stake in Alibaba while CEO of Yahoo. Before its IPO last September, Yahoo held over 500,000 shares of Alibaba through its Hong Kong subsidiary. As part of the IPO, Yahoo sold 140,000 shares at $67.18 (net of fees), for gross proceeds of $9.4 billion. We can’t stop there, though. In order to repatriate that cash into the U.S. so it can be distributed to shareholders, one must apply a 38% corporate tax rate to the gain. Net proceeds from the Alibaba IPO are $5.8 billion.


  • Yahoo HK Holdings (On-Going Alibaba Interest). Yahoo continues to hold 383,565 shares of Alibaba. The impact on Yahoo’s valuation is driven as much by the share price of $BABA as it is by the eventual tax implications. Let’s stick with the worst case assumption of a 38% tax rate. With Alibaba trading at roughly $100 per share, that peg’s Yahoo’s interest at $23.8 billion (or $38.4 billion before taxes). However, we must look at a range here. Since its IPO, Alibaba has traded between $85 and $120. Given that price range, the tax-affected value of Yahoo’s on-going interest in Alibaba is $20.2 – $28.5 billion.


  • Yahoo Japan. Yahoo owns a 35% interest in Yahoo! Japan, or just under 2 million shares. The entity is currently trading in Tokyo at a USD price per share of $3.40. The same repatriation tax implications are in effect here. Given a 10% move in price in either direction, we estimate the tax-affected value of Yahoo’s interest in Yahoo Japan to be $3.8 – $4.6 billion.


  • Yahoo’s Core Business. This leaves the last component – Yahoo’s core search and advertising business. We’ve analyzed the financials over the last five years along with a number of analyst research reports to determine a reasonable set of projections over the course of the next year. After excluding its earnings in equity interests (Alibaba and Yahoo Japan), we project Yahoo will earn approximately $0.37 through next September. Based on its comps (GOOG 25.7x PE; AOL 38.0x PE; MSFT 18.2x PE), we expect the core Yahoo business would conservatively trade at a PE multiple between 20x-30x. Our projected value of Yahoo’s core business is between $7.6 – $11.4 billion.


Assuming no tax-efficient structure is found, our fair value range for $YHOO is $41.3 – $54.3 billion ($44 – $57 per share). With Alibaba trading at $100, our fair price estimate is $50 per share.


THE IMPACT OF A TAX-EFFICIENT SOLUTION. That $50 fair value estimate assumes that Yahoo management is unable to deliver a tax-efficient solution here. The significance of their finding a solution cannot be understated.

  • Taxed at 30%. If Yahoo is able to limit the taxes on its current Asian assets to the 30% level, it would increase the projected fair value range to $47-$62 per share.
  • Taxed at 20%. If Yahoo is able to limit the effective tax rate to 20%, it would increase the projected fair value range to $51-$67 per share.


CONCLUSION. Given our estimate of $44 – $57 per share assuming no tax-efficient structure can be found (unlikely), there appears to be little downside and significant upside based on current pricing. In fact, if management is able to deliver tax-efficiency within its Asian assets, the upside is dramatically (25%+) higher. And this does not assume any real growth in Yahoo’s underlying core business.




BONUS: The Chart. Prior to the Alibaba IPO, investors used shares of Yahoo as a way to play the Chinese internet giant. In the immediate aftermath of the IPO, shareholders fled as they now had direct access to Alibaba. Since YHOO stabilized in mid-October, it went on a dramatic surge higher from $36 to $52. Interestingly, after hitting almost exactly the 38.2% Fibonacci retracement of that recent move, shares of Yahoo bounced. The RSI and MACD both reached oversold levels. We expect the climb to continue.

$AAPL in 2015

August 30, 2015 (UPDATE #12)

Some of you may have noticed that we witnessed a bit of drama in the markets last week. After closing in the high $190’s the prior Friday, the SPY tanked and gapped down over $15 on Monday morning. As you’ve probably read numerous times elsewhere, the “oversold” indicators were flashing like crazy. We’ll use that as a starting point to jump into Apple and our expectations for the next several months.

VOLATILITY ($VIX) SPIKE. The volatility index jumped to its highest levels since the United States nearly defaulted on its debt during the summer of 2011. We use the RSI to judge the acceleration of volatility. Usually, the 70 RSI level signifies the bottom of a pullback — remember, it is inversely correlated to the markets. We show both the RSI level and where it stands in relation to its bollinger bands (%BB) below. Typically, when the levels on Monday are reached, a bottom has been reached and investors are paying up a serious amount for “protection.”

At the bottom of the chart, you can see how reliable these indicators are. They have either called the exact bottom, or very near the final bottom, since the financial crisis. There are two potential outcomes: (a) a V-shaped recovery, or (b) a prolonged period of volatility and a longer bottoming process.


BULLISH PERCENT OF S&P500 ($BPSPX). Let’s go back even farther and look at the past 20 years. Whenever the bullish percent of the S&P500 sees a sharp downside acceleration to the 15 RSI level, the bottom tends to be in place. Over the past 20 years, we have only seen this happen four times before last week. During three of those four occasions, the market formed a V-shaped recovery – back at all-time highs within a month or two. The only outlier was 2011. So could we be repeating a slow multi-month bottom process like 2011?


RUSSELL 2000 ($IWM): LONG-TERM RESISTANCE. Before we answer that question, let’s look at the IWM. We have formed a very long-term uptrend that was broken last week. Shares dipped into the RSI “oversold” area and hit the same historical lows on the %BB (where it sits relative to bollinger bands) as two previous tests of the trendline. This week is critical – will it re-take this trend line, or see firm resistance there?


RUSSELL 2000 ($IWM): SHORT-TERM HURDLE. Similarly, just as the IWM is hitting long-term resistance, shares closed the week exactly at the 10dma. This is an indicator used by many technicians to trade the short-term – long above and short below.

IWM 10ma

2011: AN OVERVIEW AND ITS IMPACT ON APPLE. So there are a number of factors at play here. The VIX says the ultimate bottom has already been put in, but that level sits at $182 on the SPY – a long way down after the strong recovery last week. So can the market stage a V-shaped recovery like last October, or will it sucumb to a 2011-like repeat of consolidating around the lows and forming a much slower, multi-month bottoming pattern?

The chart below has a very important message – that even if the SPY forms a slow bottoming process like 2011, Apple actually performed very strongly during that timeframe. In fact, while the SPY was bottoming for 10 weeks between the lows and the 38.2% Fibonacci retracement level, Apple was actually forming new highs (though it did re-test its lows with the SPY). So it’s very possible for Apple to separate from the broader markets a bit during this time period.


SPY: THIS IS NOT 2011. If you look at the chart above, you’ll see SPY spent 10 weeks bottoming between the $104 lows and $112 (the 38.2% Fib retracement level). Now check out the chart below. $SPY has already retraced back up to the 61.2% Fib retracement level. That is very bullish. In fact, it stopped exactly at that level. The market essentially flat-out rejected the lows.

SPY 61.8 Fib 10ma

This is why we brought up the IWM resistance charts above. The fact is that there is relatively strong resistance above current levels. We would not at all be surprised to see that resistance hold for some period of time as shares of SPY consolidate between the 38.2% and 61.8% Fib resistance levels. Since the acceleration down was so strong, it’s hard to see shares simply moving up in a straight line. The downside momentum rarely stops on a dime. Instead, you need to see the downside acceleration slow first, with a re-test of the lows (and hopefully positive divergence on the indicators). Now, a re-test of the lows doesn’t mean that we need to see $182 again. The low $190’s would qualify – simply as a higher low. That’s what we want to see.

APPLE: LET’S TALK VOLUME. When looking at the chart below, which shows volume by price, it’s clear as day that there is a complete volume null below the $102 level. In fact, Apple has spent a grand total of 12 minutes since the middle of October 2014 trading below that level. One more time… 12 minutes below $102 in almost a year. In our eyes, that paints a picture of a firm rejection of those prices.

AAPL Volume Null Below 100

APPLE: RETRACEMENT LEVELS. Why is that volume null significant? If you look at a Fibonacci retracement from what we’re calling the “real” bottom just below $102, things begin to align. The shares ended the week right on the 38.2% Fib level, and the 200 day moving average is sitting exactly at the 61.8% Fib level. Even the 50% Fib level has shown to be prior resistance. Since the shares have formed an ascending triangle and consolidation just below this level, we’d expect a breakout to the upside – targeting either the 50% ($117) or 61.% ($120.50) levels. Again – both of these levels are prior strong resistance levels and are significant to watch.


APPLE: INVERSE HEAD & SHOULDERS BOTTOM? If Apple does in fact run up into either of these resistance levels, shares will likely find some selling pressure. That would set-up a potential inverse head and shoulders reversal pattern. The chart below is only resistance levels (no Fibonacci – just important trend lines). It paints a similar picture to the Fib levels above. A rise above last week’s highs may cause a short squeeze to re-test the 200 day moving average (and prior resistance). We could see that become a bull “trap”, with investors trying to get in before a continued rally – before re-testing the lows in the $110-$112.50 area as well as the green downtrend line. Screw with as many investors as possible… that’s the markets goal, right?


APPLE: THE BIGGER PICTURE. Another chart to keep in mind is the massive head and shoulders below. A test of the $120 level puts in play a monster potential topping pattern. This would have a target of the $70 level on a breakdown – which would make sense based on the historical importance of that level (look at 2013). Would not be one bit surprised to see more and more traders on social media calling this out on a re-test of the 200dma at $120. The thing is… Apple has set-up head and shoulders pattern so many times in the past. It was almost an annual cycle. While the 2012/2013 decline did begin with a H&S, it was one of dozens it has formed – with almost every other one breaking upwards (again…the market’s goal is take money from investors).

AAPL Weekly HS

APPLE: THE FUNDAMENTAL PICTURE. As you all know, we don’t solely look at the technicals. We’re also focused on fundamentals. The fact is, Apple’s share price tends to track its EPS growth pretty well. Preceding the EPS decline in 2013, share price turned down; and before the EPS began to climb again, the shares rallied. This is all completely justified and expected based on investors looking forward 6-9 months.

As we’ve explained previously, it would actually take a pretty dramatic 12%+ decline in iPhone unit sales to see EPS simply flatten (not even decline). Therefore, we believe share price needs to increase in order to simply re-take the trend of price following EPS. In the next three quarters, with very conservative assumptions, we expect EPS to be at $10 per share – helped significantly by the buyback.

AAPL Share-EPS Divergence

APPLE: PRICE / EARNINGS. We believe there is still a lot of merit to this chart. Above a 16.5x PE is a pretty good spot to start unloading shares and option positions in Apple, because it tends to signify very strong sentiment that can change on a dime. That’s why we sold last February and didn’t re-enter until this past June (which proved to be too soon). Inversely, buying below the 13.0x PE tends to be a very profitable venture. This shows closing prices – if we had shown based on daily lows, it would be noticable that this past Monday, shares traded at a 10.6x PE (just 1.5x PE higher than during the lows of 2013). That is startling. However, the quick reversal after just a handful of minutes shows that the market completely rejected that valuation.


CONCLUSION. With several events taking place over the next six weeks, it’s crucial to remember how quickly sentiment can change. The Apple Watch is proving itself to be in high demand as Best Buy’s analysis concluded that it should dedicate far more space to this profitable venture. The iPhone 6S will likely continue growing share. The Apple TV refresh will continue to boost that product line and bring more people into the Apple-fold worldwide. We continue to see upside in shares here.

August 23, 2015 (UPDATE #11)

Wanted to add one more chart to the mix this weekend. The $103 area will have two lines of strong support in the coming week. The first is the rising trend line from the 2013 low. The second is the horizontal support created in late 2014 and very early this year.

One (likely, in our view) scenario is to see a test of this support level followed by a significant bounce. We may even see a re-test of the $120 / 200dma level if sentiment improves at all heading into the iPhone 6S introduction or first weekend sales numbers. If we do see this scenario come to fruition, we expect to see MANY calling for a massive head and shoulders breakdown in shares of Apple. The target of a breakdown is the $70 level, which technicians will say makes “sense” because it’s a long-term support level (see below).


We do not yet have the evidence in place that this will happen – it is but one scenario that may play out. However, one interesting thing to note is that Apple has a well-established history of creating head and shoulders topping patterns as a sort of “fake out” — only to resume higher.

August 22, 2015 (UPDATE #10)

Let’s just jump right into it…

The pullback over the past four weeks has been strong and swift. During times like this, fundamentals no longer matter – only emotions. We’re clearly in a downtrend in the minor-term, forming lower lows and lower highs. But let’s start with the bigger picture.

LONG-TERM UPTREND. Apple is still undeniably in a longer-term uptrend. It has created higher highs and higher lows since June 2013. While it may be surprising given the action over the past month, this trend has not yet been broken. Only a break below $103.32 would technically form a lower low. But remember that it’s the general level – not a specific price – that’s most important. Even if shares briefly (and only slightly) break below that $103 level, it may be forming an equal low just like we created relatively equal highs from February to July.

AAPL Uptrend

2012 DECLINE: A REPLAY IN FAST-FORWARD. Looking at the chart below, we found the similarities between the Apple decline of 2012 and the current price action startling. In both cases, it started with a significant Apple event (Sept 2012 iPhone introduction; July 2015 earnings release). You can read the steps and similarities on the chart itself.

The extent and speed of the current action is really surprising. What took a month in 2012 is now taking place in a week or less. The price action is the same, the RSI is acting the same, and the location with the Bollinger Bands have mimic’d the past action every step of the way. Based on all these indicators (the most important of which is price), we now seem to be at the equivalent of $59 during the 2012 decline. It took another 10 weeks for price to bottom out in 2012; but the compressed timeline of the current decline means we may find a bottom in the next 2-3 weeks, which could coincide with or precede the iPhone 6S launch or first weekend numbers.

AAPL 2012 Comparison

WEAKNESS ON THE WEEKLY. What’s stunning about this correction is the historic nature of it. Apple has only traded below a 35 RSI on the weekly chart twice over the past decade. The first was during the Great Recession, which saw the bankruptcy of a global financial institution and multi-month illiquidity that spared no asset class. The second was near the end of the “Great Apple Crash,” that was caused by an EPS that was actually in decline. The fact is, investors are clearly concerned about Apple’s future prospects and this massive uncertainty is causing a major sell-off. It is our expectation that these fears will be subdued after the iPhone introduction, first weekend numbers, or October earnings announcement.

As mentioned in the previous chart, this minor-term downtrend looks surprisingly similar to the 2012 correction (though on a smaller scale and with much greater speed). The RSI on the weekly at the same point (#8 above) is in the very low 30’s.


THE KEY TO FUTURE PRICE. We believe this chart, which we’ve posted in the past, is extremely important. It is generally accepted that stocks price in fundamental events many months before they actually happen. This shouldn’t be very controversial… investors are forward-looking. This is clearly visible in the chart below, which captures Apple’s EPS vs. its closing share price for the month. Share price peaked in September of 2012 and began a steep descent just under six months before earnings growth actually turned negative; likewise, price began to appreciate in July, roughly six months before EPS turned positive during the holiday quarter.

Earnings obviously lead share price. It’s stunning how closely share price has followed LTM EPS over the past several years. You can see two major divergences. The first was late 2012, which turned out to be fully justified based on the declining EPS experienced in early 2013. We’re seeing it for the second time now, which will see one of two outcomes — either price needs to rapidly appreciate in order to continue the trend, or EPS needs to begin falling sometime in the October – January time frame.

AAPL EPS vEstimate

WHICH OUTCOME: PRICE APPRECIATION vs. EPS DECLINES. So the real question quickly turns to whether we will see an EPS decline, because if we do not, share price should rapidly appreciate. We put together the following chart, which assumes ZERO iPhone unit growth over the next four quarters. Now, remember, Apple has never experienced a decline in year-over-year iPhone unit sales. But let’s assume growth trickles down to zero. Not surprisingly, EPS will not only hold steady, but will continue to grow due to the buyback. In fact, it would require a 12% decline in YOY iPhone unit sales going forward just for EPS to remain constant.

AAPL EPS vZero Growth

Good luck!

July 20, 2015 (UPDATE #9)

As we looked at past instances of consolidation periods that lasted six months or more, the similarities between the 2015 price action and that of the late 2013 / early 2014 period jumped out at us. We don’t believe much more commentary is necessary… take a look for yourself and let us know what you think.

AAPL Comparison

July 19, 2015 (UPDATE #8)

Shares of Apple have rallied significantly over the past week. We alerted our readers to the strong buy opportunity in the low $120’s through tweets and a post ($AAPL Looks Like Another “Buy the Dip”).

AAPL SUPPORT ZONE. Based on the chart below, the $119 price point was clearly a very important level. Not only did this happen to be the November 2014 high (previous resistance levels turn into future support, and vice versa), but also just happened to be exactly the 50% Fibonacci retracement level. Additionally, this $119 level coincided with a 30 RSI, and sat within a point of the all-important 200 day moving average. Each of these dots connected to form a great purchase opportunity. Since hitting those lows, shares have thus far surged through every moving average and resistance level it has faced. The $130 level and all-time highs at $134 are the only two that remain. RSI has room to run and the MACD is showing a bullish cross.


AAPL WEEKLY SUPPORT. This weekly chart has a lot of great data points. The first is the significance of the 25 week moving average, which has acted as almost exact support or resistance over the past five years. While shares broke below this trend line during the week of the pullback to $119, it quickly recovered and closed the week right at the trend line. Secondly, it’s easy to visualize how prior resistance turns into future support time and time again. Resistance at $71 turned into support during late 2013 and 2014; the same thing happened at the $103 level in late 2014. Recently, the $119 level has flipped from resistance into support over the past 8 months.

AAPL wkly supt

AAPL – CONDITIONS SET TO “RALLY MODE”. This morning we put together the chart below and believe it may be one of the more important charts we’ve looked at this year. It’s a weekly candlestick chart going back to 2010 (the post-financial crisis time frame). We’ve included two indicators: the RSI and the %B, which is the location of shares against the bollinger bands (0.5 is the midpoint, 0.2 is 20% from the bottom bband, 0.8 is 20% from the top bband). When the RSI is above 50, shares are bullish in the longer-term. Below the 50 RSI level, things turn negative. You can see that the only time RSI was trading below the 50 level was during the late 2012 crash in share price. It was also trading below the 25ema. They tend to work in tandem.

AAPL - Weekly BB

What the chart above tells us is this. When (1) shares are in a longer-term uptrend, as defined by RSI above 50 and shares trading largely above the 25ema, and (2) shares hit the 0.2 %B, meaning they’re sitting in the bottom 20% of the weekly bollinger bands, it is historically a great buying opportunity. When you also add in the 25ema trend line as support, it becomes a “perfect” buying opportunity.

There have been five times when we’ve seen this same exact scenario set itself up: August 2010, May 2011, November 2011, late March 2014, and again last week. Over the following 8 weeks, shares were up between 19% and 33%, with an average of 26% (it’s good to note that the lowest percent discounts another 40% return during the 2 months following our 8 week “cutoff”).

This would equate to $AAPL achieving a $150 share price by the middle of September, which is the likely timing of the next iPhone release. After a six month consolidation phase, we believe the “slingshot” is set and conditions are ripe for a rally to this level.

February 18, 2015 (UPDATE #7)

On the heels of our post from last night (“Update #6” below), we’ve been studying historical chart patterns and technical indicators from the past several years that would convince us to re-enter on the long side. As a trader/investor, one important aspect we all need to fight is confirmation bias – the tendency to see only the evidence that supports our previously held belief. But the more we look, the more evidence we find that points to, at a minimum, consolidation around current levels.

THE RALLY OF 2012. When we began reviewing the chart below of the epic 2012 rally, we began to find some unique similarities to the current price action. Let’s go through the chart one step at a time.

Shares gapped up after a strong earnings report and found new all-time highs after riding the upper Bollinger Band for weeks. RSI remained elevated in the 80’s during the final three weeks of the rally, with the MACD at the +4 level. Subsequently, a series of two lower highs and three lower lows developed over the coming weeks (red and green arrows), eventually finding final support at the 100 MA. A rally ensued, forming a cup and handle pattern that spanned the same length of time as the initial rally (both lasted roughly 10 weeks). Lastly, shares broke out to the 61.8% Fibonacci extension level, where it consolidated for four weeks before one final push higher.

AAPL 2012 v1

THE RALLY OF 2014/15. We copied and pasted the explanation for the 2012 rally below. Any changes we needed to make for the 2014/2015 rally are highlighted in red font.

“Shares gapped up after a strong earnings report and found new all-time highs after riding the upper Bollinger Band for weeks. RSI remained elevated in the 80’s during the final three weeks of the rally, with the MACD at the +4 level. Subsequently, a series of two lower highs and three lower lows developed over the coming weeks (red and green arrows), eventually finding final support at the 100 MA. A rally ensued, forming a cup and handle pattern that spanned the same length of time as the initial rally (both lasted roughly 7 weeks). Lastly, shares broke out to the 61.8% Fibonacci extension level, where it consolidated for four weeks before one final push higher.”

AAPL 2012 v2

TIMING. What’s really interesting is the timing of all this. Remember, the iPhone 5 launch called the peak of the rally. Coming into the launch, shares rallied to new highs for four weeks, consolidated for four weeks, then spent the final week making one last push higher into the launch. We could see the exact same thing here.

Tim Cook set expectations at an early April launch for the Apple Watch. Based on previous launches, we’d expect the re-introduction event to take place roughly two weeks beforehand, in the third week of March. Until this week, shares spent a month rallying to new highs. They’ve spent the past week between the 38.2% and 61.8% Fibonacci extension levels, and may continue in that range for another three weeks. During the week before the launch, it could make a last push higher.

THETA BURNING. In last night’s post, we illustrated three different technical analyses / chart patterns that all pointed to the $129.50 level as being a strong area to take profits. This is one more piece of evidence suggesting that the rally is likely to slow here, at least for a few weeks. For those holding shares, the 2012 chart may actually be a sign to hang on for another 6-8 weeks to juice the last of the gains. But for those holding options, one month of consolidation burns away theta and decreases the value of positions.

CONCLUSION. Technical analysis is largely the study of trader psychology. So much of what happens in the market is driven by emotion and psychology. That’s why we study the historical effects of certain price patterns – because they often repeat. Interestingly, the only real difference between the rallies of 2012 and 2014/15 is that the former lasted three weeks longer (in both the initial rally and the subsequent C&H). Everything else has been the exact same… but will it continue to be?

February 17, 2015 (UPDATE #6)

We sold out of all short- and intermediate-term Apple positions this morning. As we detailed in our earlier updates found toward the bottom of this post, we began allocating significant positions in the $106-$108 range during the second and third weeks of January. Shares have increased by 20% since then and our options positions have gained 120%-200%, depending on expiration.

RISK / REWARD. To put it simply, the risk / reward ratio is no longer clearly favoring the bulls. As we’ve detailed in many of our posts, our goal is to enter low-risk positions that have significantly higher upside risk than downside risk. It’s not clear that this remains the case with Apple. Just like in late November, when we exited Apple anticipating resistance at the top of the rising channel (illustrated below), the fundamentals continue to be strong. Sentiment is as strong as ever, with the Watch coming soon and rumors of cars down the road. But that’s exactly when it pays to be cautious.

LONG-TERM RISING CHANNEL. We’ve been focusing on the the rising channel chart below for over a year. The $129.50 level that was touched today happens to be the fifth time over the past two years that shares of Apple have hit the upper trend line. Each previous occurrence has proven to be the top of a near-term rally and beginning of either a pullback or multi-month consolidation. We are absolutely not advocating turning bearish or shorting the stock here. But this is no longer a name that we want to hold in the short-term, based on the current risk / return skew. Further, MACD and RSI are nearing very overbought conditions.

AAPL Channel

CUP & HANDLE BREAKOUT. We posted this chart during the first week of February and added to our near- and intermediate-term positions as Apple broke out of the C&H pattern. At that time, we illustrated the 61.8% Fibonacci extension level as our target price, which also rested at the $129.50 level (interestingly, the same level indicated by the top of the rising channel above). While it’s absolutely possible that shares continue up to the 100% measured move point at $135, we do not intend to place our hard earned money on that occurring. Trading is all about the probabilities. At the $106-$108 level, and again at the $120.50 level, the probability of seeing noteworthy gains was very high. At current levels, it is no better than 50/50 in our view. Again, not a reason to turn inherently bearish or short the stock.


AB-CD PATTERN. Lastly, that same $129.50 level marks the top of the AB-CD pattern, mimicking the Oct-Nov 2014 rally. We often see these symmetries play out in the market. A first leg higher is followed by consolidation, then a second leg that matches – or nearly matches – the initial leg.


CONCLUSION. The fact that all of these differing technical analyses and patterns have lined up with targets at the $129.50 level is meaningful, and we will respect it. We’re thrilled with the gains we’ve seen to start the year and don’t mind pulling our chips off the table in search of charts with better risk / reward profiles.

February 10, 2015 (UPDATE #5)

Shares of $AAPL are likely on the verge of breaking out. There are a few prices targets to watch in the near- and intermediate-term for those currently holding or looking to get into the name.

NEAR-TERM TARGET: $123. The first level to watch is the 100% measured move of the inverted head and shoulders we’ve been watching (illustrated below). After earnings, it ran into resistance first at the 38.2% Fibonacci extension level. It has since hit the 61.8% level and consolidated. If shares do continue to the upside – and it does look like they will – we expect a quick test of the 100% level ($123).


CUP & HANDLE TARGET: $130-$135. Apple shares have formed a very nice looking cup and handle formation over the past ten weeks. The cup spans a range of roughly $15, which is the target move to the upside if shares do break out. This is an intermediate-term, multi-week target. Remember, this also represents a 100% measured move target. A more conservative level would target the 61.8% Fibonacci extension of this target, or roughly $130.


LONG-TERM RISING CHANNEL TARGET: $130-$135. Another target level could be defined by the top range of the very long-term and well-defined rising channel that $AAPL shares have formed over the past two years. The top of the channel currently sits at $130, and it is rising by roughly $3 per month. By the end of March, it will be resting at the $135 level. It’s also important to notice that the RSI is on the bullish half of the range and has plenty of room on the upside; the MACD is also firmly in the bull camp and rising sharply.

AAPL Channel

FIBONACCI EXTENSION TARGET: $130. We tend to see a lot of symmetry in the charts. After a significant rally, we see shares pause and consolidate, often times forming a bull flag or pennant. After that consolidation exhausts itself, a resumption in the rally often mirrors the prior run. Looking at the previous rally in $AAPL that led to the Dec-Jan consolidation, it lasted 25 points over six weeks. If we apply the same Fib levels to the recent rally off the $105 lows, we could see another $10 rally over the coming 3-4 weeks. This Fib level corresponds to the same $130 targets that we’ve illustrated on the previous charts.


FIBONACCI EXTENSION TARGET 2: $130-$135. It’s interesting to note that when we combine different aspects of the charts above, things continue to fall into place. A run that shares the symmetry of the previous rally targets exactly the 61.8% Fibonacci extension level of a cup and handle breakout. Clearly that $130 level is an important one. There are a number of different technical formations that point to the $130-$135 levels.


We do expect $AAPL shares to continue to the upside, assuming the broader markets are able to hold it together. The SPY was able to hold the 50MA yesterday and the futures are pointing up. Once there is a clean break of the $121 level, we will continue adding positions as the shares continue to climb and reward us. As always, it’s important to have an exit plan if things don’t go according to our expectations – make sure you have stops in place at levels which would prove that the analysis is incorrect. We will continue to update this analysis over the coming days and weeks.

February 4, 2015 (UPDATE #4)

Bull Flag. Shares of Apple have formed a bull flag since its earnings announcement last Tuesday. Since gapping up from $109, shares have consolidated between $116-$120. In doing so, they’ve formed a clear bull flag targeting the mid $120’s.


Shares are now sitting directly at resistance; a break through the $119 level could propel shares to new highs.

Head & Shoulders Bottom + Fibonacci Levels. As we’ve previously mentioned, shares formed an inverted head and shoulders with a neckline between the $113-$115 level and a bottom at $105. As you can see below, shares found resistance first at the 38.2% Fib extension, then the 61.8% extension level.

Further, we’ve added the same bull flag trend lines to show how well-defined it is.


Short-Term Moving Averages. Lastly, it’s important to watch the 5 and 10 day moving averages during a rally phase. Shares of Apple tend to ride the 5DMA while in rally mode, and test the 10 DMA every few days. As long as shares continue to find support at those levels (pink and purple MA’s below), rally mode will be in effect.

AAPL 5sma

January 31, 2015 (UPDATE #3)

Near-Term Inverted H&S. As we pointed out in our $AAPL earnings expectation post, shares were forming an inverse head and shoulders bottoming pattern. The initial post-earnings gap paused exactly at the 38.2% Fibonacci extension level of $118. The second push higher found resistance exactly at the 61.8% level of $120.

At this point, there are two scenarios we’re watching. In the first case, shares of $AAPL could consolidate around the $115-$117 level and close the post-earnings gap. We do not expect shares to lose the $115 level at this point – there should be strong support there. In the second case, shares could continue to march higher and hit that $123.50 price target. In either scenario, we fully expect shares to be significantly higher come March / April and are positioned to take advantage of that.


Longer-Term Rising Channel. As we’ve pointed out multiple times, shares of Apple bounced at the bottom of the rising channel, which also happened to be the 100 DMA. Consolidation around the all-time highs is to be expected… it would have been more surprising for shares to simply slice through the $120 level. However, we do believe that if shares to continue to consolidate in the $115-$120 level, it will likely be a nice buying area heading into the Apple Watch event in March and what should be another solid earnings report in April.

AAPL Channel

January 22, 2015 (UPDATE #2)

DOWNTREND RESISTANCE. After finding support again at the 100 MA, shares of Apple are attempting to break through the downtrend resistance for a fourth time. That (thin blue) resistance level has converged with the year-long channel trend line, the 38.2% Fibonacci retracement level, and also happens to sit just below the 50 MA. This is clearly an important level for the stock. We need to see a strong push through this level. If we do see that, the double bottom it recently formed would have a 100% measured move to the $120 price level – exactly to its all-time high formed in November. If shares languish here, they are likely to continue trading between the 50 and 100 MA levels until earnings.


LONG-TERM RISING CHANNEL. Shares of Apple, along with shares of any stock that has a significant options trading, tend to be pulled toward the “max pain” or highest open interest during the expiration of leaps (typically quarter-ending options that have been available for many years). On January 16, options expiration day, Apple was pulled down to the $105 level. It just so happens that this level coincides with the bottom of the long-term rising channel. As we expected – and explained – before options expiration, It was a great area to open additional long-term positions for bullish investors.


APPLE P/E RANGE. Aside from the $105 level being important support due to the rising channel, there’s also a more fundamental basis for the support. At $105, the LTM P/E after next week’s earnings release will sit almost exactly at the 15.0x P/E level. Significantly, we’ve provided a thesis (above) that shares of Apple are likely to trade in a 4x P/E range through 2015, as it has historically done over the past many years. We expect that range to be roughly the 15x-19x P/E levels. Based on a $105 close, shares would be sitting at the bottom of our projected range. The chart below assumes a $105 share price the day after next week’s earnings announcement. We would expect to find very strong support there, which provides additional rationale for our low risk/return expectation on adding new long-term positions at current levels.


January 7, 2015 (UPDATE #1)

After spending some more time reviewing the AAPL charts, we found an extremely similar series of price action that we believe is applicable. Remember, technical analysis is largely a study of investor psychology, which is one of the largest aspects driving the market. Historical price action does have a way of repeating itself.

April / May 2012 Comparison

AAPL 42012

Price Action:

  1. A gap up created by an earnings beat drives shares significantly higher.
  2. After riding the upper Bollinger Band for multiple weeks and several periods of vertical price spikes, shares peak at an all-time high.
  3. Just days after hitting all-time highs, an event (April 2012’s iPad refresh / Nov 2014’s mini flash crash) drives shares down $10 in a single day.
  4. Shares largely recover over the coming days, forming the first lower high.
  5. Immediately, the stock again drops (this time through the 50 MA before finding support at the lower BBand), forming a lower low $3-$5 below the previous low.
  6. Again, the stock recovers much of the gain quickly, but again creates a new lower high.
  7. The stock has one final drop and finds support at the 100 MA as well as the lower BBand.
  8. RSI dropped from the mid-80’s to the mid-30’s.
  9. MACD dropped from a high of +4 to below zero.


  • After finding support at the 100 MA in May 2012, shares climbed 35% over the next six months to reach fresh all-time highs. This was driven by the strong year-over-year earnings growth and non-stop chatter about the new iPhone 5.
  • The current environment shares the same basic fundamental story and investor sentiment. Based on our current projections, we anticipate 15-20% earnings growth through FY 2015. Additionally, excitement is starting to build for the new Apple Watch and other yet unreleased products.

January 5, 2015

It is often said that stocks price in fundamental events many months before they actually happen. This shouldn’t be very controversial… investors are forward-looking. This is clearly visible in the chart below, which captures Apple’s LTM EPS (earnings for the prior four quarters) vs. its closing share price for the month. Share price peaked in September of 2012 and began a steep descent months before earnings growth actually turned negative the following April.

Earnings Lead Share Price (obviously). We will publish our detailed 1Q 2015 estimates in the coming days, but we included a preview of our EPS projections on the chart. It’s amazing how closely share price has followed the LTM EPS over the past six years. Investors fled the stock months before negative earnings took hold, and returned months before there was a clear road map towards a return to EPS growth. Based on our estimates for FY 2015, we expect share price appreciation to follow the significant EPS growth we’re projecting.


Valuation. The simplest method of valuation is achieved by applying a multiple on earnings, also known as a Price/Earnings ratio (or PE). Typically, a stock trades within a valuation range set by large investors. Below that range, they buy shares bringing it back up. Above that range, they sell and bring shares back inside the range. That range changes over time as the fundamentals of the business shift.

Thesis: Apple Trades in a 5x PE Range for 18-24 Months. As you can see in the chart below, Apple tends to stay within a range of roughly 5x PE for 18-24 months. As the dynamics of the business and economy change, the ranges shifts up and down. During 2009-2010, investors traded Apple between an 18x-24x PE. That dropped in 2011-2012 (13x-18x PE) and again in 2013 and early 2014 (9x-14x PE). For the past six months, investors have placed a 15x-19x PE valuation on shares of Apple. It is our expectation that this will continue to be the range through 2015.


Early 2015 Price Action. Based on the recent 15x-19x PE range and our roughly $7 LTM EPS estimate for the upcoming quarter, we would expect shares to trade $15-$20 points on either side of the $120 level. Coincidentally, this fundamental valuation lines up nicely with the technical action and chart patterns.

In the validated and well-defined rising channel below, there is an implied near-term range of $105 – $130. We would expect shares to find strong support around the $104 level (at the lower trend line), while RSI also reaches an oversold level. We never want to be caught flat-footed, though. If shares do slide easily through that trend line, we will be stopped out of any bullish positions.


Near-Term Price Action. The $104 level is significant in the chart above as it represents the well-defined bottom trend line. There are two additional factors creating strong support at the $103-$104 level, shown below.

  1. Fibonacci Support. $104 currently represents the 61.8% Fibonacci support level from the October low to the recent highs.
  2. Prior Support. There were numerous attempts to take out the $103 level in September before shares were finally able to bust through that resistance in late October. Strong resistance tends to flip into strong support on the way back down.


Very Near-Term RSI Support. Additional support comes in the form of the RSI. Historically, when shares reach the mid-teens level on this indicator, it is a sign of capitulation by investors. This level has marked a near-term bottom in the majority of cases (green arrows), very near a bottom in several others (orange arrows), and failed in one instance (red arrow). Typically, shares bounce back $3-5 very quickly from these levels.


CONCLUSION. We are beginning to position aggressively in intermediate- and long-term option positions as well as shares. However, if shares do break below those important support levels we discussed, we will exit our positions and wait to re-enter at another time. Fundamentally, we expect 2015 to be a very strong year for Apple. It makes it even more exciting when the technicals and fundamentals align.

Bearish on $TSLA

January 5, 2015

As explained in our “2015 Resolutions in Focus“, we’re going to begin providing longer-term investment theses. The first that we’re going to take a look at is $TSLA. While the fundamentals of the company remain strong, the plunge in oil prices may have a significant negative impact on the company in the longer term.

A Break in the Uptrend

After spending nearly three years in the $30-$40 range, TSLA shares powered higher to nearly $300 in just two years. During that enormous run, the shares formed a bullish uptrend with a series of higher highs and higher lows. That’s exactly what you want to see during a rally. It creates a number of strong support levels for the stock.


However, during that rally, the MACD and RSI both formed significant and long-term negative divergence. While shares continued to hit higher highs, these two indicators continued to decline and form lower highs. Along with these longer-term warning signs, a number of other very bearish indications emerged in just the past four weeks.

  1. A Break in the Uptrend. In the last week of November, TSLA broke below the very well-defined support line that formed over two years. Last week, the shares re-tested that level and were clearly rejected.
  2. Lower Low. Shares created a lower low for the first time. The previous low came in at the $220 level, while TSLA dropped below the $200 level during December.
  3. Moving Average. the 40 week moving average has historically proven to be a strong support level. That MA is now acting as resistance for shares, which failed last week on a re-test of that level.
  4. Negative Divergence. The MACD and RSI indicators continue to show significant weakness.
  5. Head & Shoulders. A massive head and shoulders pattern has emerged in the daily chart (below).

Massive Head and Shoulders

A very well-defined head and shoulders pattern has emerged on the daily chart. The all-time high price for TSLA marks the top of the head; the neckline sits at just about the $220 level, which has also acted as strong support for shares over the past six months.


Why a Confirmed H&S Pattern is Bearish. After breaking below the uptrend support level (rising dotted black line), TSLA shares created a lower high, i.e. the right shoulder. This is what makes a head and shoulders pattern significant. Investors first create a new high (left shoulder), before testing support at the neckline. When that support level holds firm, investors are able to bring shares up to a higher high (head). The neckline support is held again, but investors are not able to bring shares back up to the previous level, forming a lower high in the process. This is a mark of waning demand for shares, which are then able to break below that previous neckline support level.

Neckline Support. As you can see with TSLA, that neckline was broken and investors re-tested the neckline from below. The neckline support isn’t a single price (i.e. $220 exactly), but instead is a range. In this case, it’s the $220-$230 level. The TSLA re-test was actually testing resistance at both the neckline as well as the 50 and 200 day moving averages. Shares failed to re-take all of those levels and have turned back down.

Additionally, there is negative MACD divergence forming on the daily chart. While higher highs in price were created, the MACD continues to create lower highs. There has been some unknown selling pressure in shares for some time.

CONCLUSION. We’re taking a bearish position in $TSLA via shorts and longer-term options. We need to give the pattern time to prove itself and don’t want to be caught in anything shorter-term. The H&S breakdown target is $150, but we’re watching the stronger support level of $140. A break back above the 50/200 DMA’s (roughly $230) would negate our thesis, which is the level at which we would exit our position.

2015: Resolutions in Focus

January 4, 2015

Happy New Year! The start of a fresh trading season is the perfect opportunity to refine your approach to investing. It’s crucial to think through what has gone right in your investing strategies and, just as importantly, what hasn’t. What did you do particularly well? Think through a specific thesis that proved correct; ride a trend well; capture a breakout at a predefined chart pattern entry? As the saying goes “do more of what worked, and less of what didn’t.”

We must resolve to focus on what has worked well for us and limit what has not:


  • Longer Time Frame. One aspect that we’ll focus on in 2015 is providing longer-term investment theses combined with detailed rationale. We will continue to provide compelling charts with defined entry points. But after spending time thinking about the purpose of this site and what we are trying to achieve, it became clear that we’ve been focusing our energy explaining the technicals at the expense of other investing opportunities. We trust our valuation work and will use technicals to aid in the entry and exit of longer-term positions.


  • Defined Exits. Any time emotion enters the equation, our trading has underperformed. We will continue to place contingent sell orders on options positions (or a stop loss if using shares) each and every time we trade. It takes all emotion out of trading and forces us to determine the exact entry and exit levels prior to taking a position.


  • Don’t Force Opportunities. By far, our most significant successes have come when we’re able to take advantage of a clear opportunity in the markets. Times like the October (and early December) pullback, where the markets bounced off numerous indicators that we were watching closely. Conversely, our weakest trades came when the markets were boring and we forced trades. Over-trading is a dangerous game to play in the markets.


  • Build Into Positions. One of the most pertinent messages in “Reminiscences of a Stock Operator” is the advantage of incrementally building positions. When our trading thesis is wrong, it’s usually wrong early in the trade. By keeping position size small at that point, we limit our losses and get stopped out quickly. On the flip side, this strategy allows us to add to our position incrementally if it unfolds according to plan. As Jesse Livermore opined, big movements take time to develop. As long as a stock is acting right, do not be in a hurry to take profits.


  • Dangers of External Validation. There are two types of threats posed by validation. The first is social validation, which is the tendency to look to others to decide what to do. It is during those times that we are most uncertain that we will most look to others to decide how to proceed. The second is that the more uncertain you are, the more you defend your idea. When there aren’t clear facts forcing us to change our belief, the tendency is to deny the new information and further defend our previous belief. Both of these are very dangerous in trading and investing. The more confident we are in a trade, the more we seek out information that confirms our point of view. We must strive to do just the opposite: do not look to others (especially twitter traders) when uncertain on a chart; and search explicitly for reasons why your thesis might fail.