Apple Tests Its Earnings Risky Level - Here's the Trade

Book profits on shares of Apple on strength above $327. The downside risk for 2020 is my annual value level at $253.68.
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Apple  (AAPL) - Get Report shares touched record levels Wednesday after the tech giant reported strong iPhone sales in the quarter ended in December.

CEO Tim Cook noted he was concerned about the spreading coronavirus in China, which is an important market for Apple.

My call is to book profits on the stock on strength above $327. My weekly risky level for this earnings period is $327.91.

Shares of Apple trade at a price-to-earnings multiple of nearly 27 with a dividend of less than 1%, according to Macrotrends. The multiple was 38.6 at the end of 2007 and 12.24 at the end of 2008, after the crash.

Apple has beaten earnings-per-share estimates in 15 consecutive quarters. The question is whether the spreading coronavirus will end this streak. Here's the link to the earnings coverage by TheStreet.com.

Apple’s strong bull run has not come without corrections. 

The stock traded as high as $215.31 on May 1, then fell by a bear-market 21% to a low of $170.27 on June 3. Back then the stock was a buy on weakness to its annual pivot for 2019 at $182.85.

Then on July 31, the stock peaked at $221.37 and then corrected 13% to a low of $192.58 on Aug. 5. 

The Daily Chart for Apple

Daily Chart For Apple

Daily Chart For Apple

Courtesy of Refinitiv XENITH

The daily chart for Apple shows that the stock has been above a golden cross since May 8, when the 50-day simple moving average rose above the 200-day SMA. That move indicated that higher prices would follow. 

Even so, the stock slipped to a test of its 2019 annual pivot at $182.85, which was a buying opportunity. 

The stock has been above its 200-day SMA since June 7, when the average was $190.45.

This chart clearly shows the two corrections previously discussed.

This year the stock faces risk to its semiannual, quarterly and annual value levels at $262.02, $260.02 and $253.68, respectively. 

A decline to $253.68 would be a bear-market correction of 22%.

The close of $293.65 on Dec. 31 was an important input to my proprietary analytics. The three horizontal lines bunched together at the middle of the chart are the semiannual value level for first-half 2020 at $262.02; the first-quarter value level at $260.88, and the annual value level for all of 2020 at $253.68.

The Weekly Chart for Apple

The Weekly Chart For Apple

The Weekly Chart For Apple

Courtesy of Refinitiv XENITH

The weekly chart for Apple is positive but extremely overbought, with the stock above its five-week modified moving average of $300.77. 

The stock is well above its 200-week simple moving average, or reversion to the mean, at $170.80. On Jan. 2, 2019, this average was tested at $141.85 as a major buying opportunity.

The 12x3x3 weekly slow stochastic reading is projected to end January at 95.46, still well above the overbought threshold of 80 and well above 90, leaving the stock in an inflating parabolic bubble formation.

Beware: The stock is 47% above its reversion to the mean.

Trading Strategy: Reduce holdings on strength above $327. Buy weakness to the semiannual, quarterly and annual value levels at $262.02, $260.88 and $253.68, respectively.

How to use my value levels and risky levels:

The closes on Dec. 31, 2019, were inputs to my proprietary analytics and resulted in new monthly, quarterly, semiannual and annual levels. Each uses the past nine closes in these time horizons.

New weekly levels are calculated after the end of each week. New monthly levels occur after the close of each month. New quarterly levels occur at the end of each quarter. Semiannual levels are updated at mid-year. Annual levels are in play all year long.

My theory is that nine years of volatility between closes are enough to assume that all possible bullish or bearish events for the stock are factored in.

To capture share price volatility investors should buy on weakness to a value level and reduce holdings on strength to a risky level. A pivot is a value level or risky level that was violated within its time horizon. Pivots act as magnets that have a high probability of being tested again before its time horizon expires.

How to use 12x3x3 Weekly Slow Stochastic Readings:

My choice of using 12x3x3 weekly slow stochastic readings was based upon back-testing many methods of reading share-price momentum with the objective of finding the combination that resulted in the fewest false signals. I did this following the stock market crash of 1987, so I have been happy with the results for more than 30 years.

The stochastic reading covers the past 12 weeks of highs, lows and closes for the stock. There is a raw calculation of the differences between the highest high and lowest low versus the closes. These levels are modified to a fast reading and a slow reading and I found that the slow reading worked the best.

The stochastic reading scales between 00.00 and 100.00 with readings above 80.00 considered overbought and readings below 20.00 considered oversold.

A reading above 90 is considered an inflating parabolic bubble formation, which is typically followed by a decline of 10% to 20% over the next three to five months.

A reading below 10 is considered too cheap to ignore, which typically is followed by gains of 10% to 20% over the next three to five months.

Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.