TECHNICAL ANALYSIS APPLE (AAPL)

Stock Price – has pulled back 25% from all time highs since October 1, 2018.

Money Flow – has recovered from an ‘Oversold’ condition and is in an uptrend. The reading is currently at 43. 80 is ‘Overbought’, 20 is ‘Oversold’.

Momentum – has stabilized from a downtrend and is starting to turn upwards, providing the first indication that shares can start to be accumulated.

On Balance Volume – shares have been in a selloff downtrend. There is a first indication that the downtrend line has been broken and shares are starting to be accumulated.

Technical Support – is established at $168. This defines the initial downside risk.

Volume – has risen from an average of 28M shares per day to over 39M. Reflecting High Frequency Trading most likely by computer algorithms.

Price Target 1 : $180 which is also the first point of Technical Resistance where profit taking may occur.

Price Target 2 : $200 is a second level of resistance where trapped buyers in the $200-$205 range will look to sell and just be happy to get their money back.

The Gap: there is a gap between Target 1 and Target 2. Generally there would have to be a ‘fill the gap’ period between these two prices where buyers have to come in and accumulate shares from previously trapped buyers in that zone who just want to get their money back and ‘break even’. However, the volume of shares sold off was so massive over a six week period, which is confirmed by the Money Flow and On Balance Volume, that there might not be many of those buyers in that range who held onto their shares. Further Apple has been buying back almost $20B of shares each quarter, as part of a $100B repurchase authorization, in an effort to defend it’s share price from short selling. The company views shares as undervalued. It can be very clearly seen where Apple made a stand, repurchasing shares at $200 then $190 then $170. There might not be a lot of resistance at those levels as the periods of buying were brief and may largely have been Apple, meaning there might not be many trapped bulls. 

The Long Term chart provides three interesting indications.

1. Money Flow – lowest ‘Oversold’ indication in 2.5 years
2. Extreme downwards Momentum
3. Long Term Technical Support near $165

 Why did the share price pullback?

At moneywiseHQ it’s important to understand why a share price pulled back in order to identify whether there is an opportunity or a threat which invalidates the Investment Thesis.

There were three primary catalysts for the pullback, however they are all interrelated

1. iPhone sales disclosure : during the October 31 Earnings Conference Call, Apple announced that it would no longer be reporting iPhone Unit sales as a separate item. This reduced analysts ability to establish price estimate models. Which analysts clearly didn’t like.
2. Lower than expected Guidance : during the October 31 Earnings Conference Call, Apple announced guidance of $89-$93B for the December quarter guidance. This was a record revenue forecast for Apple, however it was below analyst estimates of $93B. 
3. Trade war retaliation : one of the overhangs to Apple since February 2018 has been the threat of a ‘soft boycott’ of Apple products by the Chinese as a retaliatory measure. To date Apple has been spared from tariff application. A ‘soft boycott’ or the application of tariffs would impact sales and profit.

With lower than expected guidance and the non disclosure of unit sales, analysts viewed that Apple was expecting lower sales and the non-disclosure validated this. Further validation occurred when a number of ‘Apple suppliers’ provided their quarterly reports and indicated lower guidance on the basis of order cancellations.

To put this into context consider the following points 

1. On Quarterly guidance: The quarter includes October, November, December. As of October 31, Apple already had its sales figure for the month leaving only November and December to estimate. This would have made for a pretty accurate estimate.
2. On Apple suppliers: Apple stated in it’s Quarterly report, ‘if you look at the products that we have created and are manufacturing, they’re really manufactured everywhere. We have significant content from the U.S. market. We have content from Japan to Korea to many countries, and we have great content from China as well, and so there are many hands in the products.’ – Tim Cook Apple CEO
3. On order cancellations: Often in the past when Apple has launched a new product they have been criticized for not having enough supply to meet demand, particularly during the holiday season, and therefore not having achieved the maximum potential sales volume and profitability. A ‘Just in Time’ manufacturing strategy allows a company to very tightly control inventory based on demand which minimizes carrying costs. This requires parts (supplies) to be available. Good management looks for opportunities to overcome weaknesses, over-ordering and exercising the option to cancel is a supply chain management strategy.

The stock price has pulled back 25%. The November 1 Earnings Report was strong. The bottom end of the revenue guidance range of $89B – $93B was only 4% lower than analyst estimates.

The $100B share buyback program and strategically buying $20B of shares each quarter has been a strong defence, however when the market conditions were perfect for the short sellers, wiping out out over $250B of market capitalization value, there is very little defence to that.

This similar pattern and strategy was seen with Tesla during the pullback from $360 to $250. TSLA has fully recovered.

It’s possible Apple may need to stabilize for a period in the $170 area, however as shares are accumulated, there will be upwards pressure. We’ll be watching this closely.

From $170, the downside risk is defined at $165. The upside reward is identified at Price Target: 1 $180 then Price Target 2: at $200 providing 3% downside risk and 7% – 28% upside reward.

While individual stocks may technically appear set to move, the reality is that the broader market is selling into rallies.

Place a disciplined ‘Stop Loss’ sell price near $165. As prices rise, adjust the Stop Loss to trail 3% behind.