Trade of the Day: Apple (AAPL)

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The song remains the same for this market, as the major indices are still penned by the ongoing trading range, and my indicators are neutral to slightly negative, just as they were last week. What is new this week is that many momentum stocks are starting to crack, and one half of the stocks in the S&P 500 are down 14% or more from their highs, signaling a rotational correction.

Stocks are getting pummeled on any kind of negative news. Chevron Corporation (CVX) is down 8.5% since July 31, when second-quarter net profits came in at their worst level in 13 years. We saw Walt Disney Co (DIS) drop 15% from its all-time highs after reporting a revenue miss in its earnings statement on Wednesday. And, on Thursday, Lumber Liquidators Holdings Inc (LL) was hit hard on an earnings/revenue miss, while Keurig Green Mountain Inc (GMCR) dropped almost 30% after beating earnings estimates but cutting sales forecasts. Shares of GMCR, which were formerly $75, dropped almost 22 points in the course of a day.

Despite reporting record quarterly revenues and earnings per share that beat analyst expectations, shares of Fitbit Inc (FIT) crashed almost 14% yesterday, as gross margins came in weaker than expected. Similarly, Etsy Inc (ETSY) has dropped 30% in just the last two days after reporting a quarterly loss. Again, earnings per share and revenue figures beat estimates, but forward guidance was weak, and investors have fled these relatively new issues in droves.

It’s not unusual to see stocks fluctuate after reporting earnings, of course, but the reactions to negative news have been worse than usual this quarter. There’s an old Wall Street saying that when they raid the house, they take all the girls — and the piano player. What that means is: Everything falls when you have a correction.

The backdrop for these individual stock swoons is that the market is just not on solid ground. China, Brazil, emerging markets in general and commodities all remain as big problems. Each is in its own bear market, and that tells us that we’re eventually going to pay the price in the equity markets, so the beat-down on stocks could get worse.

My best guess at this point is that the trading range will hold in the short term, and then I think we’ll see the beginning of what could be a major decline in September or October. That’s when the sellers will “raid the house.”

For now, this continues to be a tough market to trade because everything is happening so fast. While I will be looking for select upside opportunities, my bias is likely to be to the downside as summer winds down, and I will be keeping any bullish plays on a tight leash.

My outlook for one of the stocks that’s been carrying this market, Apple Inc. (AAPL), isn’t much better. As such, today I’m recommending an Apple put option.

Buy to open the AAPL Oct 100 Puts (AAPL151016P00100000) at $1.25 or lower. After entry, take profits if the stock price hits $106.80 or the option price hits $3.00. Exit if the stock price closes above $119.20.

If after three days you still have not gotten the position filled, cancel the order and watch for my new recommendations, as the profit probabilities may no longer be valid. Additionally, if the option or its underlying stock does not hit its target, or if the stock does not close at or below its sell signal price within three weeks of entry, close the position. I do not recommend holding an option play for more than three weeks.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/08/trade-of-the-day-apple-aapl-6/.

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