One of our arguments against holding Apple Inc. (AAPL) stock ahead of its earnings announcement was that the stock was just too crowded with optimistic investors. This situation remains as much a prevalently bearish force as it did in December — and that indicates that Apple stock will underperform the market over the long run.
That said … the technical activity of AAPL is beginning to make it a potentially attractive trade candidate.
Yes, that’s right: Apple stock, for which I really have no affinity, is approaching levels that I could considering a short-term buying opportunity. It’s just not there yet.
Apple’s Charts Look Promising
Looking at the charts, Apple stock is creeping toward some significant technical events that could spark a rally. First, the long-term chart is beginning to flash signs that Apple stock is sliding towards a technically oversold reading. These readings are marked by low readings of the current Relative Strength Index (a technical oscillator), displayed at the top of the monthly Apple stock chart below. Historically, the last two signals from this indicator preceded 20% to 25% runs in Apple stock.
AAPL’s Relative Strength Is Returning
Second, Apple stock is starting to regain some market strength against the S&P 500, which suggests that the short-term buyers are moving in on AAPL. Relative strength measures the strength of a stock against something else — in this case, the S&P 500. The relative strength chart for Apple stock is showing some short-term strength similar to what we saw in late August 2015.
These short-term bursts of relative strength often give traders an opportunity to grab a bullish trade, even if it could turn out to only be be a short-term bounce.
Options Data Is Promising
Finally, the third trigger of our short-term bullish bias on Apple stock comes from the options market. Our contrarian approach means that we’re always looking for some sort of sign of pessimism to trigger a bull run for a stock. In Apple’s case, this sentiment is coming from the stock’s options data.
During the past two months, the options market has been opening puts on Apple stock at a rapid pace. Of particular interest to us is the large amount of puts that are now open at the $90 price level, which is one of the largest strike prices of put open interest.
Our historical data shows that put strike prices with relatively high levels of put open interest often act as mechanical support for the underlying stock.
Our model’s work on Apple stock suggests that a $90 print on AAPL shares would trigger a short-term bullish trading scenario that would likely see the stock move to $100 or higher over a short period of time.
The Last Word on Apple Stock
From a longer-term perspective, Apple stock remains likely to underperform the S&P 500 in 2016 as the shares are still among the most widely held and recommended shares on Wall Street. As we discussed in our article ahead of its last earnings announcement, stocks that fall into this category often underperform the market until the crowd capitulates away from their overly bullish outlooks.
We see this capitulative move as not even likely to happen during the first half of 2016.
Bottom line: Take your short-term opportunities as just that — short-term — since the longer-term outlook for Apple remains tepid.
As of this writing, Johnson Research Group did not hold a position in any of the aforementioned securities.
