Learning to ‘Fix’ with a Bite from Apple (AAPL, FXI)

We’re going to start with China today. Why? Because that country is as good as any in the world of tyranny and unyielding authoritarianism.

china

No mocking intended, your Royal Firey-ness.

Then knock it off!

 

Oooh… Or else?

That’s right. Or else we’ll send this –

carterbrown

O h m y g a w d …

Back to China

 

If you remember, we penned a piece back on the 29th of December called China Breakout Imminent. There, we wrote –

“What we see is a market that’s headed toward a multi-year breakout. After unwinding higher for the first time in almost four years, the iShares China Large-Cap ETF’s (NYSE:FXI) moving averages now point to a stock that’s gathering itself for a push on the venerable $42.50 resistance line. That’s a level that hasn’t been surpassed since FXI trundled beneath it in late summer of 2011… And with both RSI and MACD cooperating, we could see that breakout any day.”

We closed the trade two weeks ago, and took home a whopping $480 on a $200 investment (a return of 240% in a month – see Bellybuttons and Zeroes), but we’re preparing to reset it any day now.

Here’s the way the action played out –

fxi126

Midway through last week (and just twelve trading sessions from our ‘imminent breakout’ call) China BigCap investors hit paydirt. The long-awaited punch above $42.50 materialized (red line), signaling that from here on out we should see a freight train rolling through the Szechuan Highlands.

Additional technical support for this view is offered by RSI and MACD indicators, both of which are trending above their respective waterlines and pointing to further gains (black boxes).

But we won’t jump back on board the FXI train just yet – not until we see her drop back to her former resistance/new support line at $42.50.

Stay Tuned

 

Follow us at Normandy for more on that one, but right now cuddle up to hear why the China breakout is important for our trade today.

With Europe in shambles, the U.S. in a temporary funk, Japan skidding and the rest of the developing world plain stuck, China’s latest burst above resistance is a trigger that will likely stoke the engine of global stock buying.

Note we didn’t say it would stoke anything ‘economic’. That may, too, transpire, once folks start believing that Shanghai is back in bull mode. But a genuine economic revival on a global scale is not for us to measure or predict here. It may be beyond the reach of even the most decorated economists.

What we are predicting, rather, is that money will once again start to move in the direction of equities, particularly American, over the next three to five weeks.

Though it will be China’s burst higher that will gather a great deal of attention during that time, we feel it’s the U.S. bull that will outperform, and it’s there that we’re turning our focus once again.

Lay it on us, Huey!

 

The latest moves obligate us to address a trade we opened just three weeks ago in a letter called Study to Win! There, we questioned the momentum of Apple stock (NASDAQ:AAPL) and recommended you consider a bearish PUT spread with the following specs –

We told you: buy the AAPL March 105 PUT for $4.30 and sell the AAPL March 100 PUT for $2.57. Total debit for the trade was $1.73.

But today we see it differently.

With volatility declining and the NASDAQ set to jump higher alongside strength in Shanghai, it’s more than likely that Apple shares will begin to rise as well.

Indeed, given Wall Street’s growing skepticism over fourth quarter earnings, the stage is now set for a bigger than expected spike in the indexes, as earnings season reports peak over the next few weeks.

Here’s a chart of the above mentioned skepticism –

netearnings126

Equity analysts have been downgrading expectations nearly 20% faster than they’ve upgraded this quarter, and that could mean more positive surprises as the pace of announcements quickens. It’s very common to see companies beat estimates in this sort of pessimistic environment.

Not to be outdone, we also see Main Street increasingly worried about their stocks’ prospects.

These charts from the American Association of Individual Investors (AAII) show both a steep drop in the number of bullish investors and a steep rise in the bears. That, too, is traditionally a harbinger of a coming turn for the indexes.

Look here –

aiibearish

All told, bulls saw a greater than 30% decline in their numbers over the last two months, while the number of bears doubled over the same period!

And that’s bullish, Nestor.

So what do we do with our AAPL trade?

 

Sure enough, we have to get rid of that long PUT immediately. It currently sells for $2.38, and we’re going to take it.

As to the short 100 PUT, we’re going to leave it be. To buy it back today would run us $1.39, and as far as we read the charts, there’s no need to act on it. We’ll have a look at the technicals presently, and then describe for you our backup plan, or ‘fix’, should the trade turn against us later.

Here’s the chart –

aapl126

We’re focused on just the last three months action because that’s where the relevant technical features reside.

1. First, as of last Friday’s action, AAPL is setting higher highs and higher lows, a bullish development that speaks to ongoing strength (in red).

2. We have all the moving averages unfurled and trending higher with price is above them all (in black).

3. And finally, we see RSI surfacing above its waterline (in blue) and MACD just days from doing the same.

Altogether, a near-term bullish picture emerges for Apple, so we prefer to get out of the way.

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We’ll take our $2.38 against the initial $1.73 we shelled out for the trade and let the short PUT ride. That’s a $0.65 profit-cushion to place against the trade going sour on us.

Indeed, if that happens, we’ll simply buy the 97.50 PUT, situated just below our short 100’s and limit our losses in a worst-case scenario to $2.50.

Wall Street Elite recommends you consider closing out your long March 105 PUT for $2.38.

 

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We’ll take our $2.38 against the initial $1.73 we shelled out for the trade and let the short PUT ride. That’s a $0.65 profit-cushion to place against the trade going sour on us.

Indeed, if that happens, we’ll simply buy the 97.50 PUT, situated just below our short 100’s and limit our losses in a worst-case scenario to $2.50.

Wall Street Elite recommends you consider closing out your long March 105 PUT for $2.38.

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With kind regards,

Hugh L. O’Haynew, Senior Analyst, Normandy Research

See what people are saying...

  1. Robert Ruggirello

    So are you going long Apple or just sitting it out?

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