After a rip-roaring 16% post-earnings rally that took shares of Apple Inc. (NASDAQ:AAPL) to fresh all-time highs, AAPL stock finally ran into some selling pressure along with the rest of the market yesterday. I look for Apple to now enter into a consolidation period now that the technical upside momentum has been broken.
Certainly AAPL stock was getting extended on a 14-day RSI basis, with shares being by far the most overbought in the past year.
Click to Enlarge More importantly, candlestick analysis shows that AAPL had a bearish engulfing pattern emerge. The first candle shows the trend strength is waning. The following candle signals a reversal in the stock, with shares opening higher on the day and making fresh highs. These new fresh highs then fail to hold, with the stock reversing to close lower on the day and also close below the previous day’s low.
Click to Enlarge This is exactly the formation just seen in Apple and is usually a very reliable short-term bearish indicator, highlighting that the buyers are likely exhausted and the sellers have taken control.
Since AAPL is the largest market cap stock in the S&P 500, it is vitally important to monitor the relative value comparison between AAPL stock and the S&P 500 for extremes. Recently, AAPL stock had reached an extreme reading versus the SPDR S&P 500 ETF Trust (NYSEARCA:SPY).
The last time AAPL traded at such a premium to the SPY was the second quarter of 2015, which marked the previous high in the price of AAPL stock.
Click to Enlarge Now sporting a price-to-earnings ratio of nearly 17 and a dividend yield of just 1.6%, both the valuation and income metrics of Apple are not nearly as compelling as they were only a few months ago. Monster rallies change things, and ultimately price matters.
Implied volatility picked up noticeably due to the drop in the stock, so option prices are no longer comparatively inexpensive. So to position for an expected consolidation in AAPL stock over the coming weeks, option selling strategies such as a bear call spread finally make sense again.
AAPL Stock Trade Idea
Buy the AAPL Apr $146 calls and sell AAPL Apr $144 calls for a 40-cent net credit or better.
Maximum gain on the trade is $40 per spread, with maximum risk of $160 per spread. Return on risk is 25%. The short $144 strike price is 3% above the $139.84 closing price of AAPL stock and also above the $142.80 all-time high.
As of this writing, Tim Biggam did not hold a position in any of the aforementioned securities. Anyone interested in finding out more about option-based strategies or for a free trial of the Delta Desk Research Report can email Tim at tbiggam@deltaderivatives.com.
