After rallying nearly 20% off the Feb. 24 intraday low of $93.32, Apple Inc. (AAPL) is rubbing against major resistance at the $112 level. I look for Apple stock to struggle to get past this level over the next few weeks, with a pullback overdue.
Click to EnlargeAAPL briefly traded at $112.19 on Monday, only to be met with selling pressure to close the day lower at $111.12.
This type of reversal day, especially following a prolonged rally and at a critical technical juncture, can many times be a sign of a short-term top.
Apple stock also is overbought on a 14-day RSI basis, with a reading that approached nearly 75. Last time AAPL was this overbought coincided with the all-time high of $134.54 on April 28 of last year.
Click to Enlarge Another reliable sentiment indicator, the 20-day detrended price oscillator, paints a similar picture.
This indicator gauges how far the Apple stock price is above or below the 20-day moving average. The prior three readings of this magnitude all occurred at significant tops in AAPL, as seen in the chart below.
Click to Enlarge Apple also has outperformed the overall market lately, trading at highest comparative level of the year.
The Nasdaq OMX Alpha AAPL vs. SPY Index (AVSPY), an index that measures the comparative performance of Apple stock to the S&P 500, is trading at the highest level of the year and entering overbought territory as well.
In a note out Monday, respected KGI analyst Ming-Chi Kuo projects demand for the iPhone 6 to come in below expectations of 200 million units for 2016. Kuo also thinks the recently launched iPhone SE will likely disappointment and that the more popular 4.7-inch iPhone won’t be getting the new advanced iSight camera upgrade.
Click to Enlarge With Apple stock exhausted technically, and with growth prospects diminishing, I’m going long a put diagonal spread on AAPL in anticipation for a pullback. Earnings are due April 25, so I want have my trade expire before then.
Specifically, I would buy the AAPL April $109 puts (expiring April 15) and sell the April $108 puts (expiring April 8) for a 38 cent net debit. The maximum risk on the trade is $38 per spread, with the maximum gain realized if the Apple stock price closes near $108 on April 8 expiration (Friday).
Make sure to close out the trade (for a gain) if AAPL is below $108 on Friday to avoid assignment.
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.
