AAPL: After the earnings miss

Apple Inc. (AAPL) on Thursday broke below its 55-day low during trading just before releasing earnings after the close, and pushed further down today (Friday) before retracing significantly from the lows. The company fell 2% short of analysts' expectations.

It previously cut below its 20-day low on Oct. 8, confirmed by the relative strength index, and has in the main moved lower ever since.

So the chart shows a deluxe bear signal on Apple according to the Turtle trading rules. Otherwise, not so much.

AAPL bounced off of a swing low of $522.18 on May 18, beginning an upswing that carried it to an all-time high of $705.07 on Sept. 21. It subsequently swung into the present near-term downtrend.

However, the rise from May hasn't been negated. The most recent leg up began July 23 at $570, and it would take a drop below that level for me to count count a lower low on the chart.

And the $522.18 swing low from May indeed ended a minor correction in an uptrend that began in 2009 from $78.20.

So for my account, it's not yet panic time.

But of course, as private traders we never panic out of a position in any case, but instead base our exits on a cold and fearless analysis of our charts.

I find the price profile today to be fascinating. The most-traded price is $597.59, which is above the day's low of $591 set around noon Eastern. It has since risen to just shy of $607, and just now (2 p.m. Eastern) established a new most-traded level at $603.61.

This tells me that traders are treating this setback as a temporary occurrence, not an OMG We're Doomed! black-swan-of-death event.

The fair-price zone on today's 30-minute chart runs from $596.49 to $609.91, encompassing 68.2% of transactions surrounding the most-traded price, and with AAPL trading at 11 a.m. just above the new most-traded level.

Options are trading only about 1% above their five-day average volume, with calls ahead at 1% above compared to 11% below for puts. These are basically ho-hum it's Friday figures.

Volume on the daily chart has set a new peak for the week, at 28 million shares so far, but for than a fifth of that volume came in the first half hour of trading, as the price fell.

Volume then declined and has continued to do so throughout the day, as the price fell and as it recovered.

That's a bearish pattern -- a panic out at the open as the overnight traders' orders were executed, and then declining interest the rest of the day.

The original Turtle Trading rules would require an immediate exit, without hesitation, with the 10-day low was pierced. My directional rules provide a bit more leeway, but I would have been out weeks ago.

However, my AAPL holdings are in the form a diagonal spread, which operates on slightly different rules than my directional trades based on Turtle signals. I'm short the $650 November calls and long the $630 Decembers.

With a bullish directional trade I exit when the price drops below the 10-day low, which in the case of AAPL would have gotten me out on Oct. 2 at around $656.50

But I'm not eager to trade in and out of diagonal spreads, which depend in part of the decay of an option's price over time. My incentive is to continue holding the position.

So my rule is to exit on a drop below the 55-day low. That has happened, but it came about based on earnings.

Today is the first trading day since earnings were published, the Earnings Day in the terminology of my trading rules. I'm not allowed according to those rules to trade in or out of a stock on that day. The next trading day, Monday, I call Reset Day, because that's when traders sit back and reset their expectations.

If AAPL remains below the 55-day low of on Reset Day, I'll close the position.

A final thought: Time spreads tend to be more slow-moving than directional trades. That's how time works. It ticks along at the rate of one minute per minute. And that characteristic can be loss-making in the case of a rapid move such as AAPL showed today.

That raises the question of whether time spreads, like diagonals, are really a good vehicle for trading, except for people with a long-term horizon, six months or a year away. I

Decision for my account: No trade today, for the reasons outlined above, but maybe on Monday.

Disclaimer

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.

No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.