How to Trade Apple's Bungee Jump

NEW YORK ( TheStreet) -- The performance of Apple ( AAPL) since setting an all-time high at $705.07 on Sept. 21 is mind boggling considering that the stock has 22 strong buy ratings and 28 buy ratings according to Yahoo Finance. Apple has only 5 hold ratings, one under-perform rating and one sell rating.

At www.ValuEngine.com we have been tracking Apple using a three-pronged approach that helps investors and traders capture volatility in a strategy I call buy-and-trade.

ValuEngine provides a quantitative approach to equity analysis that begins with the stock valuation model, which is based upon many variables. One important data point is the 12-month trailing P/E, which is 12.47 for Apple. A second important piece of data is the 12-month forward price to earnings ratio, which is based upon Wall Street estimates. For Apple the forward P/E is 10.62 (Yahoo Finance shows 9.49). The third important input is the yield on the U.S. Treasury 30-Year bond, which is 2.77% at Thursday's close. The current low yield environment elevates equity valuations.

The most important calculation from the valuation model is a stock's fair value, and Apple's fair value is $619.60, which makes the stock 11.68% undervalued.

We also know that Apple had a 12-month return of 41.22% and a five-year average annual return of 20.32%, which makes the stock one of the best performers despite the bungee jump since Sept. 21.

The most important calculation from the ValuEngine forecasting model is a stock's one-year price target, and for Apple this price is $578.53 for a projected 12-month gain of 5.72%. Since this reading is above 5% the stock's rating is currently a buy.

On Nov. 21, I wrote Santa Claus Rally Eyed for Online Leaders Apple, Amazon and Google with Apple closing at $560.91 the day before. In this post I suggested that investors and traders book profits on strength to the stock's five-week modified moving average at $586.46, which was tested on Nov. 26.

On Nov. 27, I wrote, Apple Wakes Up to a Downgrade to hold from buy. The first bungee jump off the Nov. 16 low of $505.75 came to a halt just above $594 on Nov. 29 and Dec. 3. Weakness to $518.63 yesterday, plus the return of the buy rating was reason enough for the stock to have a bungee jump to $553.31 intra-day.

The third component of a buy-and-trade strategy incorporates my proprietary analytics, which are based upon nine years of closing prices; the past nine week's, nine months, nine quarters, nine half-years and nine years. The resulting value level is the price at which to buy a stock on weakness and a risky level is the price at which to sell a stock on strength.

Sometimes there's a pivot price in-between, which tends to be a magnet. If a value level or a risky level is violated in its time horizon, it becomes a pivot for the remainder of that time period. These types of pivots have an 85% chance of being tested again during the period.

Here's how to trade the Apple Bungee Jump: The daily chart for Apple shows the 28.2% bungee jump from $705.07 on Sept. 21 to $505.75 on Nov. 16. Of course no one can capture 100% of this move but with a disciplined approach you can capture a portion of this bungee volatility.

The daily chart also shows what technicians call a "death cross" where the 50-day simple moving average, now at $602.31 trends below the 200-day at $601.26. This simply fortifies these averages as resistances, or levels at which to reduce positions on strength.

Note also that at the high on Sept. 21 that the daily momentum (12x3x3 daily slow stochastic) reading was overbought (greater than 80.00), and then at the bungee low on Nov. 16 that this reading was oversold (less than 20.00). Apple began this week overbought as the stock stayed below its 200-day SMA.

My proprietary analytics show a wide gap between this week's value level at $511.22 and this month's risky level at $612.60.

While the odds do not favor either level to be tested during the bungee downs and ups, there is nothing wrong with a strategy of using good until cancelled GTC limit orders to buy weakness to $511.22 and to sell strength to $612.60.

Chart Courtesy of Thomson/Reuters

At the time of publication the author held no positions in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
Richard Suttmeier has an engineering degree from Georgia Tech and a master of science from Brooklyn Poly. He began his career in the financial services industry in 1972 trading U.S. Treasury securities in the primary dealer community. In 1981 he formed the Government Bond Department at LF Rothschild and helped establish that firm as a primary dealer in 1986. Richard began writing market research in 1984 and held positions as market strategist at firms such as Smith Barney, William R Hough, Joseph Stevens, and Rightside Advisors. He joined www.ValuEngine.com in 2008 producing newsletters covering the U.S. capital markets, and a universe of more than 7,000 stocks. Richard employs a "buy and trade" investment strategy and can be reached at RSuttmeier@Gmail.com.

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