Following a sharp four-day, 12% rally from the Sept. 12 intraday lows of $102.53, Apple Inc. (NASDAQ:AAPL) has consolidated and moved sideways for the past three weeks. Yesterday’s sharp reversal in Apple stock off the early morning highs is further proof of the difficulty that AAPL is encountering in moving significantly higher.
With AAPL stock coiling ever tighter, I’m looking for a breakout sooner than later.
Apple Stock Charts
Apple stock had an epic rally following news that iPhone 7 sales were stronger than anticipated. AAPL broke through the critical $112 resistance level, which now is major support.
Given the magnitude of the move, it appears that it may have been a case of too far, too fast. The proof: Apple had trouble gaining further upside traction.
Yesterday’s intraday price action further shows the difficulty Apple stock has had in moving appreciably higher. After failing to break out to a new high at the $114.30 level, shares dropped nearly a point in the subsequent 10 minutes, then closed the day at $113, well off the highs of the day.
This type of reversal is many times indicative of a short-term top in place, especially following such a sharp rally.
The spinning top candlestick formation is further evidence of the indecision surrounding AAPL’s direction. This “big range, no change” type of price action shows that both buyers and sellers currently lack the conviction to move AAPL stock meaningfully either higher or lower. Clearly, Apple has settled into an ever narrowing trading range, with a series of higher lows and lower highs.
Right now, $112 is major support, with $114.30 becoming meaningful resistance.
It’s also interesting to note that the $114.30 equates to a 2% yield on AAPL. You see, now that Apple has become more of an income stock than a growth stock for many institutional investors, the 2% yield level likely has become a fundamental resistance point for some of the income oriented funds. I alluded to this in my previous article on AAPL stock.
While not impossible, it is difficult to imagine Apple stock remaining in such a tight trading range for much longer. With earnings due Oct. 27, shorter-term options have become relatively inexpensive. So for traders looking for a cheap way to play a breakout, diagonal spreads make sense, for both bulls and bears.
2 Trades on Apple Stock
- Bullish breakout: Buy the AAPL Oct 21 $114 calls and sell the AAPL Oct 14 $115 calls for a 75-cent net debit.
- Bearish breakdown: Buy the AAPL Oct 21 $112 puts and sell the AAPL Oct 14 $111 puts for a 73-cent net debit.
In both cases, we are looking to buy the traditional monthly options that expire Oct. 21 while selling the weekly options that expire Oct. 14.
Maximum loss is limited to the net debit paid.
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.
