Online education company Apollo Education (APOL) has seen more swings than a playground over the past few years as the company’s business model continues to get challenged by regulatory issues, among other things. Now, a “smart money” short rumor is the latest push behind a heavy APOL stock move.
Apollo’s most recent earnings report, released April 1, came in mixed, but sales were down 19% on a year-over-year basis. The stock’s initial reaction on April 1st was higher, but the very following day gapped down right at the open and has never looked back since.
Given the continuing issues surrounding the company it was somewhat curious to me that activists had somewhat ignored APOL stock. Yesterday, however, several rumors made the rounds that Bill Ackman’s Pershing Square hedge fund had initiated a short position in APOL stock. As of this writing this remains unconfirmed, but the rumor did make me sit up and take notice — particularly as Apollo Education’s shares also look vulnerable from a technical perspective.
Just like activist investors can be a bull’s best friend, they can also help the bears push down any given stock. It’s usually never as easy as just buying or shorting stocks where activists are involved, but over the years I have found that if a multitude of other factors also line up with the activist stance in a stock, then the likelihood of a successful trade is greatly enhanced.
APOL Stock Charts
As a result of the Apollo-Ackman rumors, APOL stock lost more than 9% Thursday on good volume.
Looking at the stock’s multiyear chart stretching back to 2009, the downtrend is clear and the overhead resistance is palpable (see the blue box). The stock’s rally off the early 2013 lows came to an abrupt halt as it bumped into lateral resistance, and former support is now resistance, as well as the diagonal resistance line from the 2009 top.
On the daily chart, APOL stock showed a great deal of resistance in the early part of this year in the low $35 area. On April 1 (after earnings), Apollo rallied but topped on the same day. The very next day, APOL stock gapped down and set foot on a 10-day nonstop descent.
After reaching oversold readings, APOL stock then began an oversold bounce, which formed a classic bear flag pattern, and which found resistance right at the down-sloping 50-day simple moving average (yellow line). Yesterday’s rumors then finally pushed the stock out of the bear flag to the downside.
APOL did manage to close the day on Thursday above its 200-day MA (red line), which might be the last hope for the bulls, at least from a technical perspective.
Active traders and investors can thus now consider shorting APOL stock, using Thursday’s highs as an absolute worst-case stop loss area, and eying the low $20s as a profit target.
Personally, I am looking to play this with a small position size.
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Download Serge’s trading plan in the Essence of Swing Trading e-book here. As of this writing, he did not hold a position in any of the aforementioned securities.