AAPL: Bearish on Apple's future

Apple Inc. (AAPL) broke below its 20-day price channel on Thursday, sending its first bear signal since June 28. So much for the innovative power of the new iPhones announced two days previously, on Sept. 10.

I don't doubt Apple's ability to innovate, even without Steve Jobs. I think traders are looking more at Apple's ability to out-innovate its competition in a crowded bazaar. In introducing cheaper iPhones, it seems to be competing on price rather than product, always a bad sign in my book.

AAPL 1 year daily bars

Apple had a 5.5% opening gap to the downside Thursday morning, a serious event for a stock that, until a year ago, was the darling of the "what goes up must always go up" crowd.

Yet, neither a downside gap nor a break below the price channel means automatically that it's time to jump into AAPL with a bear play.

AAPL peaked on Sept. 21, 2012, at $705.07 began an Elliott wave correction. It has since the peak fallen in five waves down to a low on April 19 of $385.10, the end of the broader time-frame A wave. It recovered in a B wave up to $513.74 on Aug. 19, and then resumed its decline in what I have labelled as a C wave.

It is also possible to consider the 2012 peak to be the end of an uptrend, which would require a major downtrend beginning with five waves down in a process that would ultimately bring the price down to the single digits. This would align AAPL with the leading Elliott wave though regarding the S&P 500 and other broad indexes.

AAPL 11-year weekly bars

However, I don't see that count on the AAPL chart from 2002 onward. I count three waves up, which suggests a correction down to $195 at the most before the uptrend begins.

Remember that we're talking fairly grand scales here. For my shorter-term time horizon, I'm more concerned with the present C wave down, which ought to play out in five smaller scale waves.

Since the September 2012 peak AAPL has broken out to the downside five times previously. Two of the bear signals earned a profit, on average yielding 8.8% over 39 days. Three were unprofitable, losing -3.6% over 11 days.

That's a positive 5.2% yield spread, but I don't like the odds.

I won't go through the full analysis of Apple and its finances.. It is probably the most written about company on the planet. Need info? Google it.

With daily volume averaging 13 million shares a day, AAPL has an awesome selection of option strike prices space $5 apart (which is quite narrow for a $474 stock) with four-figure open interest. The bid/ask spread on front-month at-the-money puts is 0.6%, an extremely narrow spread.

Implied volatility stands 28%, in the bottom third of the six-month range, and has been zig-zagging sideways since mid-August.

Option are pricing in confidence that 68.2% of trades will fall between $436.19 and $511.93 over the next month, for a potential gain or loss of 8%, and between $455.87 and $494.25 over the next week.

Call options are trading at about 60% above their five-day average volume, and put options at about 70%.

Apple next publishes earnings on Oct. 22. The stock goes ex dividend in November for a quarterly payout yielding 2.57% annualized at today's prices.

Decision for my account: I loved AAPL for its strike price selection, high open interest and narrow spreads. It is an options trader's dream.

I'm OK with the chart, despite its essentially bullish nature over the longer term. I don't like the odds and would like to seem them improve before opening a bear position in AAPL. 

Also, as I was writing this AAPL moved to a counter-signal gain intraday and levitated back into its 20-day price channel, failing to confirm the bear signal.

So I won't be opening a bear position in AAPL. Still, it was an interesting exercise, and if AAPL moves back into a decline and earns a profit on this bear signal, that would give it even odds, increasing my interest in a trade.

References

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

I use the number 68.2% in using applied volatility to calculate the expected trading range. This comes from statistics and refers to the one standard deviation boundaries, which are expected to contain 68.2% of whatever is being studied. Putting it another way, given an item (a trade or whatever), there is a 68.2% chance that it will appear within those boundaries.

Elliott wave analysis tracks patterns in price movements. StockCharts has a good explainer. The principal practioner of Elliott wave analysis is Robert Prechter at Elliott Wave International. His book, Elliott Wave Principle, is a must-read for people interested in this form of analysis, as is his most recent publication, Visual Guide to Elliott Wave Trading. 

By preference I place my trades in the last half hour before the closing bell in New York. See my essay "When is the best time to trade" for a discussion of the practice.

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.