The Apple of Everyone’s Eye (AAPL)

We’ve seen two distinct and contradictory vectors in the equity market of late.  One that includes indexes like the Dow, the utilities, the broad commodities complex, the financials, the energy sector, healthcare giants like Johnson & Johnson, European and even Russian (!) issues, along with a host of consumer staples names like Kellogg’s (among others), which are showing strength.

 

On the other hand, big tech names like Microsoft, Cisco, Google, Intel, Apple and a few others, have performed with demonstrable weakness over the last few weeks, alongside Chinese shares and the U.S. Dollar.

 

The dollar aside (as that’s a separate issue), we have to wonder which group is the dog and which the tail?

 

But even more important for those who want to succeed in this market is the question of which group is perceived as the dog and which the tail?

black and white

As for that, there’s little question that the media preoccupation with the likes of Apple and Microsoft over the last while is proving a far better ‘story’ than any strength behind the names enumerated in the first list above.

 

And that’s a good thing for those of us who are still bulls after all these years.  Because so long as the media focus is negative and the majority of stock sectors are climbing, the wall of worry remains intact, and the chances of a serious break higher for the indexes remains on the plate.

 

Eyeing Apple

 

As the biggest stock on the planet, Apple Inc. (NASDAQ:AAPL) carries on outsize influence on movements in the NASDAQ, an index that, unlike the Dow and S&P 500, is capitalization weighted.

 

It’s so much the case that a strong down (or up) day for the stock can negate wholesale movements in the rest of the index’s components.

 

But more than that, knowledge of Apple’s weighting also carries influence amongst traders.  That is to say, if Apple has a bad day, and it’s understood that the index is going to fall because of that, piggy-back selling in any number of other NASDAQ issues will almost certainly follow, as those who trade these issues have to keep pace with the thousands of mutual funds and ETFs and CEFs at home and abroad who will be looking to liquidate on such occasions.

cartoon

A look at the relative performance of Apple stock against the rest of the tech sector, as represented by the Technology Select Sector SPDR ETF (NYSE:XLK), shows a grave disconnect since Apple shares topped out last summer.

 

Have a look –

xlk appl

The chart is chock full of important technical detail, and in order to better understand the trade we intend to launch today, we want to walk you through it all.

 

We’ll begin with the straightforward disconnect that exists between the price of the two securities.  Since topping last July, Apple has tumbled three time toward the –28% level, where it currently resides, while the broader sector has been flat (in red).  That’s a huge differential, and save for the company going bankrupt, it will have to close.

 

Beyond that, RSI indications for Apple have just risen from extreme oversold levels (in blue, at bottom), pointing to a near term bottom and possibly a meaningful bounce in store for the stock.  Though it’s not completely clear at this stage, MACD readings also point to a bend higher (in blue).

 

Key Support: Triple Bottom

 

We also see promise in the triple bottom found at the $92 level (in green), where serious buying (maybe insider/corporate buyback cash) has continually materialized to boost the share price higher.

 

And finally, the gap down that occurred just over a week ago will have to be filled (black arrow).  And it could happen quite quickly.

 

Why?

 

Because Apple stock is severely stretched on the downside.

 

As the following chart shows, price action on the stock recently broke to greater than two standard deviations below the fifty day moving average, the point at which ricochet bounces normally occur.

 

Take a peek –

aapl purple

As mentioned above, Apple isn’t alone in the tech sector’s oversold cohort.  The rest of the above named issues turned in reasonable performances on earnings day, but in this environment, reasonable wasn’t good enough.  After downgrading expectations inordinately over the last several months, Wall Street was willing to reward those who beat her diminished expectations, but for those who merely matched or fell somewhat below, it was straight to the waterboard.

 

Yikes!

 

The good news is expectations are, for the first time in two years, now being revised higher on a net basis.  That is, the last four weeks saw analysts upgrading more earnings estimates than they lowered – by a marginal number, to be sure, but it’s still a positive.  A full 612 companies had their EPS bumped higher, while only 605 were forecasted lower.

 

That, too, bodes well for the broad market, as past data proves.

 

We should expect a push toward new highs very shortly.

magician

First, a warning.  If Apple breaks below the $92 support level, it’s very likely to fall precipitously thereafter.  Keep a close eye on that line and be ready to close the following initiative immediately should it occur.

 

The trade is based on our observation above that Apple will eventually come to outperform the broad tech sector, that the distance between the two is an anomaly, and that a narrowing of the gap that opened in the last several weeks is inevitable.

 

We’re going to set the trade with a long CALL and a short PUT –both in-the-money.  That way, we also pull out a credit and avoid any initial outlay whatsoever.

 

And it looks like this –

 

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Options Trader Elite recommends you consider buying the AAPL October 92.50 CALL for $7.10 and selling the AAPL October 95 PUT for $7.45.  Total credit on the trade is $0.35.

 

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Options Trader Elite recommends you consider buying the AAPL October 92.50 CALL for $7.10 and selling the AAPL October 95 PUT for $7.45.  Total credit on the trade is $0.35.

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Many happy returns,

 

Matt McAbby

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