AAPL: Transitioning to distopia

Update: The position was closed on March 15 for a 2.7% loss when AAPL moved above its 10-day price-channel's upper boundary of $439.01. The mark at closure was $439.57, and the entry mark was $427.60.

Update: I opened a bear position Monday, structured as described below.

Apple Inc. (AAPL) broke below the 20-day and 55-day price channels on Friday. If it trades below the breakout level, $435, for more than half an hour on Monday, the bear signal will be confirmed, opening a trading opportunity under my rules.

Apple was once a bullish trader's utopia, with an upside that seemingly knew no end. No longer. Apple has entered a distopia rivaling Blade Runner's Los Angeles and Caprica's New Cap City.

Apple has returned to its 1984 ad, but this time, it is the gray, conforming iPhone and iPad users who need liberation.

The story is well known. AAPL hit an all-time peak of $705.07 on Sept. 21 and has since lost 39% of its value.

It is a huge transition for Apple, from utopian darling of the markets to -- let's speak frankly -- loser, the Microsoft of the 20-teens.

As Apple transitions to distopia, so too must my analysis.

AAPL has broken out to the downside 12 times since the post-recession recovery began in early 2009. However, only three of those were profitable, for a success rate of 25%. I require that my odds of winning be better than even before opening a position.

But AAPL for much of that period was a huge run up that saw the price rise nine-fold. Amid that magnitude of upside momentum, a break to the downside didn't stand a chance.

Everything changed in September 2012, when the price peaked and then moved down. Since the peak date, AAPL has broken out twice to the downside, and was profitable both times -- a success rate of 100%. The average return for the two breakouts was 8.8%.

Two data points do not a sample make. To say "100% odds" based on two breakouts is like getting heads on two coin flips and concluding that all subsequent tosses will tend to come up heads.

However, it is arguably an indication that the 25% success rate based on the larger sample may in fact be seriously outdated. At the least, it is an illustration of the idea that the periods used for chart analysis, to be meaningful, must match price trends on the chart, not the arbitrary seasons of the calendar.

(That has long been my criticism of 50-day or 200-day moving averages -- they don't map to anything real on the underlying chart. The same, actually, could be said of the 20-day price channels I use in my initial screening.)

I won't waste time with a tedious recitation of Apple's analyst evaluations or financials. The company is too well covered for me to add to the cacaphony.

I will note that AAPL's price is still high relative to the company's business. It takes $2.45 in shares to control a dollar in sales.

Friday's low is within a few dollars of a swing high on the way up, $426.70, set on Oct. 17, 2011. The following swing low on the stair-step was $363.32 on Oct. 21, 2011, and that could count as very, very weak support, so weak I wouldn't count on it to stall any future decline for more than an eye blink.

AAPL's implied volatility stands at 32%, just below the middle of the six-month range. It has been meandering sideways since late January.

Options are pricing in confidence that 68.2% of trades will fall between $391.25 and $469.69 over the next month, for a potential gain or loss of 9%, and between $411.63 and $449.31 over the next week.

Apple next publishes earnings on April 23. The stock goes ex-dividend sometime in May for a quarterly payout yielding 2.46% annualized at current prices.

Decision for my account: If AAPL's bear signal is confirmed, by the stock trading for half an hour below the $435 breakout level, I'll open a bear position, structuring the initial position as a bear call spread expiring in April, short the $450 calls and long the $470 calls.

That structure is based on Friday's close. A significant move downward would cause me to rethink the structure of the spread, or to abandon the trade altogether.

References

My trading rules can be read here.  A discussion of recent modifications to my trading methods, which haven't yet been incorporated in the original write-up, can be found here.

And the classic Turtle Trading rules on which my rules are based can be read here.

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.