Apple: How to Play the World’s Hottest Stock

by Keith Fitz-Gerald | February 21, 2012 2:22 pm

If you’re a long-term investor, there’s a lot to look forward to. Apple (NASDAQ:AAPL[1]) is much more than a brand; it’s a lifestyle. People tattoo the company’s iconic symbol on their rear ends, for crying out loud!

Always the innovator, Apple has barely scratched the surface with regard to new devices and has hardly tapped into every way in which to use them. People line up thousands-deep to buy newer versions of the company’s most basic products every year, whether they need them or not. That’s something no other tech company has been out able to do. Plus, Apple’s market share is growing overseas, with a particular emphasis on the Pacific Rim.

In China[2] alone, for instance, there’s the potential for an additional 30 million to 50 million iPhone sales in the next 12 months that could add an additional $4 to $6 in EPS to Apple’s bottom line. I remain convinced that Apple[3] could be the world’s first trillion-dollar company, and I’m not alone in my thinking. Since I first voiced that highly controversial opinion a few years ago, many other firms and analysts have joined me.

How to Play the Short-Term Apple Top

However, in the short term, Apple’s chart looks like a classic blow-off top — and technically speaking, it is. Last Wednesday, we saw the stock close near the lows of the day after a quick runup and a high volume, high-speed failure midday.

The chart tells the story:
Click to Enlarge

Like all charts, though, interpreting this is a matter of perspective. Stocks that have run a long way in a short time often require some “digestion,” or to use a market term, “give back.” And Apple is no exception, particularly when you consider the stock has moved up 44.76% in only three months, from $363.57 to $526.29.

If we contrast the prior chart with a longer-term view, we see Apple is simply accelerating ahead of a major trendline (seen below in red). Not only does this speak to a pullback for the company, which traders have simply pushed ahead of itself on nothing more than euphoria, but it also highlights the next logical value buying point, at $463 for aggressive traders — or roughly 6.96% lower than Wednesday’s blow-off-induced close of $497.67.

Click to Enlarge

Click to Enlarge
Of course, if you are more conservative, you could consider buying Apple at roughly $420 to $430, which is where Apple was trading prior to the most recent earnings announcement that fueled this latest run.

Positioning Your Portfolio in Apple Stock

When might we get there?

Blow-offs like this one typically set intermediate-term highs that last, on average, 90 to 145 days. Not always, but often, even if the stock wants to run higher in the days ahead, a period of lower price digestion is likely ahead. So there’s a little time to play.

Aggressive traders wanting to play the downside could consider put options or shorting the stock until it gets down to the $460-ish ranges, where there is likely to be aggressive buying support. More conservative investors who want to add to existing Apple positions or establish new ones may find that waiting until the price drops to the $420 area makes more sense.

Either way, be prepared for some volatility. Stocks like Apple that become media darlings tend to take on a life of their own before they settle down and then head higher.

This article originally appeared on Money Morning[4].

  1. AAPL:
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