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AAPL Nearing Major Support?

11/09/12 10:34:48 AM
by Donald W. Pendergast, Jr.

Shares of Apple Inc. (AAPL) have sold off hard since topping nearly seven weeks ago, but this key tech issue may be getting very close to a significant reversal point -- and possibly a great low-risk buying opportunity. Here's a closer look.

Security:   AAPL
Position:   N/A

What an amazing ride it's been for Apple Inc. (AAPL) shareholders over the past 12 months. This "always in the news" tech giant (which accounts for about 25% of the daily price movement in the NASDAQ 100 index) was trading within a consolidation range near 400.00 on this date in November 2011 just before embarking on two mammoth bullish trend surges that ultimately took the stock up to more than 705.00 by September 21, 2012.

While the nearly 25% correction in the stock since then may have seemingly come out of the blue for novice or ignorant traders and investors, to skilled technicians, the recent decline was no surprise at all, having given plenty of advance warning in the weeks and months leading up to that major September 2012 high. Hopefully, long-term position or buy & hold types had already begun scaling out of AAPL prior to the high of 705.07, but even if they failed to do so, they may soon be offered another opportunity to get in on a long swing trade in this volatile large-cap issue.

FIGURE 1: AAPL, DAILY. AAPL's current downswing has a high probability of reversing higher within the next few trading sessions, possibly with a bullish wave B contained within a larger A-B-C corrective wave pattern.
Graphic provided by: Sentient Trader.
There are several reasons to believe that AAPL will soon reverse higher, offering swing traders a low-risk, high-probability bounce higher, and these are as follows:

1. The stock's long-term money flow remains in bullish territory, with its current histogram still above its zero line (Figure 1).

2.Daily volume on Thursday, November 8, 2012, was extremely high, suggesting that the worst of the selling for this particular downswing may be fast approaching.

3. AAPL's 40-day cycle low (green time/price projection box) anticipates the stock to go no lower than 487.60 by November 12.

4. AAPL has major chart support at 522.18, which is the level of its May 2012 swing low.

5. After a major blowoff top like this (don't expect AAPL to see the north side of 705.00 for quite some time), corrections typically unfold as some manner of a A-B-C corrective wave. We may be at or very near to the termination of wave A, with a rally higher into the red time/price (TP) projection zone likely going to be wave B.

FIGURE 2: COMPONENT STOCKS. Five .OEX component stocks identified by the Deel Oversold Reversal as of Thursday, November 8, 2012.
Graphic provided by: MetaStock.
Graphic provided by: MetaStock Explorer.
A great trigger point for long entry in APPL might look something like this:

A. Wait for the stock to print a daily key reversal bar where it opens lower than the previous day's close, quickly drops, and then manages to finish the day at a higher close than the previous session, preferably on above-average trading volume. If you see such a setup occur, consider selling out-of-the money (OTM), near-term put options in AAPL, quickly taking profits if the options decline in value by 50% to 60% shortly after you sell them. If the options double in price, simply buy them back and wait for a better buy signal to appear. The December '12 AAPL $500.00 puts are selling for about $8.00 ($800 less commissions and slippage) as this is written. The daily time decay is nearly $22 a day per contract, the delta is a tiny 0.2021 and the options feature decent daily volume and open interest figures, making these look like a good choice for skilled put sellers to consider once you get a confirmation of a reversal higher in the stock.

B. Alternatively, you could also rely on swing trading system buy signals occurring right after such a bullish reversal, running a two- to three-bar trailing stop of the daily lows until the final stopout. Remember that once AAPL finally bottoms and reverses, it's going to be short-covering that will provide the initial fuel for a reversal rally; make sure you don't overstay your position and consider taking partial profits on your first decent move higher once you are in a long, post-reversal swing trade. (See Figure 2.)

In either case, it's important that you keep your risks on the modest side -- preferably less than 2% -- due to the fact that you'll be trading on the long side in a short-covering rally scenario.

Now, if AAPL really does catch a nice bid after its anticipated wave A reversal takes hold, the red TP box is your best cycles-based guide as to likely price ranges and time windows. The higher the stock gets into that red box, the more danger you are exposing yourself to, since a subsequent wave C (bearish) could unleash especially nasty rounds of heavy selling in the stock. Be sure to set modest profit targets and to run an initial and/or trailing stop on your long AAPL positions that eventually make it up into the red zone. Trade wisely until we meet here again.

Donald W. Pendergast, Jr.

Freelance financial markets writer and online publisher of the S&P 500 Weekly Forecast service.

Title: Market consultant and writer
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