3 Reasons to Bite on the Dip in AAPL Stock

by Tyler Craig | January 7, 2014 11:57 am

Rather than bringing cheer to Apple (AAPL[1]) shareholders, the holidays delivered a healthy dose of profit taking in the king of all i-gadgets. Since peaking at $571.88 on Christmas Eve, AAPL stock fell as much as $38 before finally rebounding in Monday’s trading session. While a 6.7% decline certainly isn’t earth shattering, it does mark the largest pullback in the tech titan since September.

Apple bulls should take heart, though. An in-depth survey of the AAPL stock chart reveals three reasons why this dip should be bought. Let’s take a look at each in greater detail:

#1: Twin Technical Catalysts for AAPL Stock

With its post-holiday slump, AAPL has descended to a key horizontal support level in the $540 region.

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After acting as resistance earlier in the fall, this price zone turned into support in mid-December. If Monday’s pivot is any indication, it appears this support level might hold strong yet again. The second potential catalyst for a rebound is the rising 50-day moving average (blue line). Often this popular indicator serves as a gathering ground for dip-buyers looking to snatch-up shares at lower prices.

#2: A Failed Breakdown

If you look closely at the AAPL stock chart above, you’ll notice Apple actually undercut the $540 support level in yesterday’s trading session. However, by day’s end, the breakdown attempt failed as AAPL rallied decisively back above support.

Here’s why this failed breakdown matters: When a stock breaks support, some shareholders sell out in fear of a continued drop in the stock, while some short-sellers pile on in hopes of a continued drop. When the breakdown fails, the old shareholders look on with regret for having sold their shares while the short-sellers look on with pain as the losses begin to mount on their short positions.

Both groups provide added fuel to the next rebound in the stock as their collective regret and pain usually lead them to buy up shares.

#3: Favorable Risk-Reward

The pullback in AAPL stock from $570 to $540 can be viewed as an opportunity to buy in at lower prices. With support so close, the potential downside (or risk) is minimal. With resistance now so far away ($570-ish) the potential upside is now much greater than before Christmas. Low-risk entries are what really drives trading returns.

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AAPL options traders might consider using the recent pullback in the stock as an opportunity to sell the Feb 485-480 bull put spread for 80 cents. The reward is limited to the initial 80 cents received and will be captured if AAPL stock remains above $485 by Feb expiration. The risk is limited to the distance between strikes minus the credit, or $4.20.

Since the short put spread is so far out of the money, traders have a large margin of error just in case AAPL stock suffers a setback following its upcoming earnings announcement on Jan. 23.

As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.

  1. AAPL: http://studio-5.financialcontent.com/investplace/quote?Symbol=AAPL

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