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AAPL Bullish Reversal Setting Up?

01/22/13 08:10:51 AM
by Donald W. Pendergast, Jr.

After enduring a four-month long decline, shares of Apple Inc. may finally be approaching a key bullish reversal zone.

Security:   AAPL
Position:   N/A

After every major rally in a stock comes the inevitable proportional retracement and/or trend reversal. The recent 17-week decline of more than 31% in shares of Apple Inc. (AAPL) wiped out all of the net gains made by the stock between early February and late September 2012, with latecomers to that buying spree getting clobbered the worst.

But every major decline into key cyclical or chart support zones offer new opportunities for bulls to get back onboard for another run higher, and AAPL is now at and/or getting very close to providing a new low-risk long entry setup. Here's a closer look now (Figures 1 and 2).

FIGURE 1: AAPL, DAILY. AAPL's recent bearish gap dropped its price below 500.00 even as a noticeably bullish price/money flow divergence was in place. Note the strong agreement among the cycles that a major low is likely to appear soon.
Graphic provided by: Sentient Trader.
After AAPL crashed right through its 200-day exponential moving average (EMA) in early November 2012 -- with that key market support/resistance marker only offering the tiniest bit of support -- the selling frenzy continued unabated until an interim low was reached on November 16, 2012.

A strong relief rally ensued, but then AAPL resumed its downward spiral, finally taking out the important 500 level on an exhaustion-gap plunge down to 483.38 early last week. As dramatic as the final stages of the selloff was, skilled technicians were watching two key dynamics at work as they helped set the stage for a likely bullish trend reversal.

The easiest one to spot was the bullish price/money flow divergence of the 34-day Chaikin money flow (CMF)(34) histogram with the bearish price action on the chart. The smart money folks are using these latest selloffs to accumulate shares from investors that are scared that another plunge may be ahead. Less visible is the alignment of AAPL's 20-, 40- and 80-day price cycles, all of which agree (see green boxes on Figure 1) that the stock has a high probability of bottoming out between 466 and 488 no later than January 28, 2013.

Given that these bullish money flow and cycle confirmations are occurring after a major, proportional decline of the prior giant rally, the odds are very high that AAPL is setting up for a powerful rally over the next month or two.

FIGURE 2: OPTIONS. The February '13 $475 put is below AAPL's recent swing low and appears to be a good candidate for a near-term put option sale that will greatly benefit from an anticipated bullish reversal.
Graphic provided by: TradeStation.
The vertical red boxes depict the direction of where AAPL is projected to travel after the anticipated reversal hits. The 40- and 80-day target prices and cycle high date appear to be the most useful here, with both suggesting the potential for sustained rallies going into February and March 2013. Note that the max target price of the 40-day cycle coincides with the December 2012 swing high price of 594.69; that could be a strong resistance barrier to be aware of, as is the stock's 200-day exponential moving average (EMA), currently near 563.

The key tipoff that a bullish reversal is for real will be when the downsloping trendline on the chart is exceeded; that's when buy signals from your favorite swing or intraday mechanical trading system should be taken very seriously.

An easy way to play this reversal is to simply sell a near-term, out of the AAPL money put option; the February 2013 $475 put is selling for about $12.90 ($1,280 before commissions and slippage) and offers a whopping $42 per day/per contract rate of daily time decay (which will accelerate as its expiration on February 16, 2013, draws closer).

Open interest is at 6,013 contracts and daily trading volume is also very good. If you sell this put, buy it back for a profit if it declines in value by 50-60% or if it rises in value by 85% and by no means let it go into the money.

Risk no more than 2% of your account value on this or any other stock/option trade and you'll automatically have an edge compared to traders who don't use proper risk control. 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
Company: Trendzetterz
Address: 81 Hickory Hollow Drive
Crossville, TN 38555
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