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Shares of Apple (AAPL) - Get Free Report have a history of declining significantly when its P/E ratio rises above 18.00. On Friday, Oct. 11, Apple's P/E ratio was 20.14, according to Macrotrends. Technically, the stock has outrun its quarterly and monthly pivots at $232.86 and $235,00, respectively, and with the stock overbought on its weekly chart, it's time to reduce core holdings.

Let me make my call crystal clear! This is not a call to sell Apple short; it's a call to reduce holdings by 25% to 50% because of its P/E ratio above 20.00 and with the stock above my price targets for the fourth quarter and the month of October. Investors should continue to own a core long position.

Apple closed last week at $236.21, up 49.7% year to date, and in bull market territory up 66.3% from its Jan. 3 low of $142.00. Apple set its all-time intraday high of $237.64 on Oct. 11. It has a winning streak of beating earnings-per-share estimates for 13 consecutive quarters.

The P/E ratio for Apple has been a good barometer to judge how to adjust the size of your forever core holding of the stock.

The chart below shows that during the week of June 30, 2013, the P/E ratio was 8.90 when the stock was close to testing its "reversion to the mean" at $55.22. This was a buying opportunity.

At the end of June 2016 when the stock tested its "reversion to the mean" at $93.31. the P/E ratio was 10.67. This was another buying opportunity.

Near the Oct. 3, 2018 high, the P/E ratio was 18.87. This was an opportunity to reduce holdings.

At the Jan. 3, 2019 low of $142.00, the P/E ratio was under 12.00. This was a buying opportunity.

Now, at Friday's all-time intraday of $237.64, the P/E ratio is 20.14. This indicates that it's time to reduce holdings.

The Daily Chart for Apple

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Courtesy of Refinitiv XENITH

The daily chart for Apple shows the huge rally from the Jan. 3 low of $142.00. A positive reaction to earnings on Jan. 29 fueled the rally to its annual pivot at $182.85, which was finally tested on March 13. This level was established by inputting the Dec. 31 close of $157.74 into my proprietary analytics. On April 30, Apple had another positive reaction to earnings, but the stock stalled at $215.31 on May 1 then declined by a bear market 20.0% to a low of $170.27 on June 3. This provided a buying opportunity to buy weakness to the annual pivot at $182.85.

The mid-year close of $197.52 was an input to my proprietary analytics and its semiannual value level for the second half of 2019 is $178.71. The third-quarter close of $223.97 was input to my analytics and its fourth-quarter pivot is $232.86, with its monthly pivot for October at $235.00. This week's risky level is $244.68.

The Weekly Chart for Apple

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Courtesy of Refinitiv XENITH

The weekly chart for Apple is positive but overbought with the stock above its five-week modified moving average of $222.69. The stock is well above its 200-week simple moving average or "reversion to the mean" at $157.16.

Note that when the P/E ratios were setting lows, shares of Apple were testing its technical "reversion to the mean" or 200-day simple moving average as buying opportunities. At the fourth-quarter 2018 high, the weekly slow stochastic reading was above 90.00 so Apple was in an "inflating parabolic bubble" and indeed the bubble popped with a bear market decline to the Jan. 3, 2019 low. At this low, the weekly slow stochastic reading fell below 10.00 making the stock technically "too cheap to ignore," so the fundamentals and technicals lined up perfectly for a buy signal.

Today, the weekly slow stochastic reading is projected to rise to 86.17 this week, up from 80.54 on Oct. 11. This reading is thus a week or two away from rising above the 90.00 threshold once again.

To summarize, the "reversion to the mean" provided buying opportunities between the weeks of Jan. 29, 2016 and July 1, 2016, when the average was $93.31 and again during the week of Jan. 4, 2019, when the average was $142.00, the exact low. As 2019 began, this reading was 7.54, well below 10.00, which made the stock technically "too cheap to ignore" and thus a buying opportunity. On May 3, this reading was 92.52, above the 90.00 threshold as its "inflating parabolic bubble" and was followed by 20.9% weakness to the June 3 low.

Trading Strategy: Reduce holdings with the stock above its quarterly and monthly risky levels at $232.86 and $235.00, respectively.

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How to use my value levels and risky levels:

Value levels and risky levels are based upon the last nine monthly, quarterly, semiannual and annual closes. The first set of levels was based upon the closes on Dec. 31, 2018. The original annual level remains in play.

The close at the end of June 2019 established new monthly, quarterly and semiannual levels. The semiannual level for the second half of 2019 remains in play.

The quarterly level changes after the end of each quarter so the close on Sept. 30 established the level for the fourth quarter. The close on Sept. 30 also established the monthly level for October as monthly levels change at the end of each month.

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 last 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. Recently I noted that stocks tend to peak and decline 10% to 20% and more shortly after a reading rises above 90.00, so I call that an "inflating parabolic bubble" as a bubble always pops. I also call a reading below 10.00 as being "too cheap to ignore."

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