Investors enthusiastically supported a brokerage call on Apple Inc. (NASDAQ:AAPL) Monday. But is AAPL stock still a buy? Today, we’re going to look at Apple both on and off the chart, then present a trade idea based on the current evidence.
Morgan Stanley came out yesterday with a bullish call for AAPL stock as the tech giant celebrated its 10-year iPhone anniversary. The firm announced Apple is a top pick for 2017, citing an upbeat appraisal of the China-driven “iPhone supercycle,” as well as potential favorable tax and cash repatriation reforms.
If it sounds familiar, it’s likely because there’s nothing new under the sun regarding Morgan’s take on Apple. As well, the call on Apple stock was a reiteration of an “Overweight” rating accompanied by a price target of $148 — about 25% higher from here.
AAPL shares did manage to finish up fractionally while the S&P 500 closed down by 0.3%. But 10 years into the wildly successful and game-changing iPhone product, Apple is facing challenges — beginning with getting China to help maintain that iPhone supercycle.
For its part, Morgan Stanley is hopeful that pent-up demand in China is there following lackluster iPhone 7 sales, and will be unleashed if the iPhone 8 is far enough along the cutting edge.
But maybe more immediately pressing for AAPL stock is President-elect Donald Trump’s well-publicized trade rhetoric. If campaign bluster escalates into a tit-for-tat situation, the success Apple enjoys as both a manufacturer and popular brand in China could be at risk, regardless of any new iPhone bells and whistles.
Respected Apple and former Piper Jaffray analyst Gene Muster recently noted the company’s size and maturity as headwinds. He emphasized Apple’s need to continue transitioning into a software services company to grow revenues, margins and “truly evolve.”
AAPL has its work cut out for it, and it will need some extraneous market favor to help grow its business. But those stars could align. And, if Apple’s stock chart is any indication, AAPL indeed could be up to the challenge.
AAPL Stock Chart
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Aside from the 0.9% gain notched in Monday’s session, shares of Apple have broken marginally above pattern resistance from October, while hitting levels last seen in December 2015.
The breakout in AAPL stock is from a cup-and-handle pattern. The price action is bullish, but a failure in the coming days could always result in a variation of a bearish double-top.
Having said that, Apple isn’t overbought, and it has cleared key 62% retracement resistance dating back to its all-time highs in 2015.
The path of least resistance appears to be up.
How to Trade AAPL Stock Now
Looking forward, Morgan Stanley’s $148 price target is still a ways from coming into play. But, with 2015’s all-time-high 100% retracement level of $134.54 and earnings on the horizon, Apple looks ripe for upside.
Right now, I’m looking for an intermediate-term bullish options spread.
Reviewing the board, the AAPL Apr $120/$125 bull call spread is attractive as a more conservative play. Priced for $2 with shares near $119, the vertical can capture 150% (or $3) in profit if Apple stock can gain about 5% by April expiration.
If AAPL remains below the bought $120 call, the spread will eventually collapse from $2 to zero.
Given a holding period in excess of three months, less than 2% equivalent risk and less than 50% of the risk associated with an outright call, this is the best trade you can make on AAPL stock right now.
Investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT.
