Apple Inc.: Fade a Still-Bruised AAPL Stock

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Following better-than-expected quarterly results, Apple Inc. (NASDAQ: AAPL) managed to summon up some animal spirits in a name that 2016’s bull market has ignominiously left behind. Nevertheless, it may be time for AAPL stock traders to fade some of the crowd’s enthusiasm.

Apple Inc.: Fade a Still-Bruised AAPL Stock

Unsurprisingly, the buy side and sell sides were out yesterday in AAPL stock. It is after all, Apple — the market’s largest publicly traded company and one used to being in the spotlight.

The buy side — or in this case, investors — jumped on board Apple shares which by the close of Wednesday’s session yielded a larger-than-expected bullish gain in excess of 6.5%.

Part of the well-received reaction in AAPL stock was due to the behemoth’s surprise top- and bottom-line beat. A gazillion financial news sound bites and hundreds if not thousands of attention-grabbing articles alerting investors to Apple’s results probably doesn’t hurt either.

Apple did fail, in a good sort of way, to reduce guidance. However, headwinds in China and pivoting to some degree on Apple’s “new, new thing” focus away from wearables and investing heavily in augmented reality or “AR” are question marks on business.

Bottom line too, I’d wager more than a few investors simply jumped on board Apple for no other reason than the expectation AAPL stock’s price performance spread has to narrow that gap in a bullish manner.

Mind you, not so long ago Apple was a veritable market proxy and AAPL stock is still off by about 2% versus NASDAQ’s approximate gain of 2% or the S&P 500’s near-6% year-to-date increase.

But is any of the above, really worth getting excited about as a bull in AAPL stock right now and especially in lieu of a steep drop in sales and projected profits for a third straight quarter?

Our view is growth traders are hoping value traders are seeing opportunity and vice versa. The problem is, everyone is already in. Even strong support for AAPL wasn’t really, truly evident from Wall Street.

A review of fresh sell-side reactions to Apple’s latest report reveals a lot of “better-than-feared” cheerleading-style relief reiterations of existing ratings from the likes of Goldman, Citi, Deutsche and others, rather than upgrades and more emphatic analyst actions.

In total, Apple has its work cut out for it or it will face being the market’s biggest value trap — or simply a stock still bruised and controlled by bears on the price chart.

AAPL Stock Daily Chart

072816-aapl-daily-stock-chart
Source: Charts by TradingView

Looking at the daily chart of AAPL stock, there’s a little bit of technical something a.k.a. support for both bears and bulls. That said, the former is favored by this strategist for the time being.

AAPL stock is currently testing resistance from the 200-day simple moving average and an extended downtrend line from 2015. Due to these formidable forces, until and if broken, the benefit of the doubt goes to the bear camp.

Additionally, AAPL stock has a knack for filling earnings gaps. As I’ve detailed on the price chart and following yesterday’s confirmation of last quarter’s report, there’s work to be done on the downside (to fill the gap) with Apple shares also overbought near-term.

For the bulls, a new uptrend could be developing off a slightly irregular double or triple bottom pattern which began during last year’s flash crash. And as mentioned, the idea of relative underperformance in AAPL stock closing the spread versus the major averages could help that cause.

AAPL Bearish Butterfly

Reviewing the AAPL options board and with shares of Apple near $104, the August $103 / $100 / $97 butterfly is interesting given what’s been discussed. Trading for about 60 cents, this bearishly positioned butterfly can profit by as much as $2.40 or return of 400% if AAPL stock lands at $100 at August expiration.

The max profit would require a retracement of about 50% of the earnings reaction, or roughly a pullback of around 4% in shares of Apple. In our view this seems approachable given the evidence.

Bottom line though, should AAPL stock close above $105, I’d take this low-cost, limited-risk bearish position and exit prior to expiration to reduce losses further.

Investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT.

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The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.


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