It’s time to face the music. Apple Inc (NASDAQ:AAPL) is overbought. In fact, shares have traded north of their 14-week relative-strength index (RSI) since the beginning of February — after the company’s last quarterly earnings report. And with the next trip to the earnings confessional just around the corner, AAPL stock needs to shed some weight or be faced with an even steeper post-earnings selloff.
Apple stock has been in rally mode for some time, but the uptrend is getting long in the tooth. The diamond of the Dow Jones Industrial Average, Apple has outperformed all other blue chips in the index so far in 2017, gaining more than 22% since the beginning of the year. But shares have stalled in recent months, battling with $140 throughout most of March, and now staring up at $145 in April.
What’s more, Apple’s 10-day and 20-day moving averages have finally caught up with the shares, but are only providing moderate price support at best. A break below these trendlines could be all the catalyst short-term traders need to take some profits off the table, potentially sending AAPL down for a test of $140 or even $138 ahead of May’s quarterly earnings report.
Sentiment is also showing signs of fatigue.
Apple options traders on Friday were less than enthusiastic despite the leak of new iMac features. Granted, the iMac isn’t the iPhone, but that hasn’t stopped AAPL speculators before. In fact,
Apple’s May put/call open interest ratio has risen in the past couple of weeks to perch at 1.03, as puts are added at a faster rate than calls among near-term options traders. Furthermore, more than 32,000 puts have accumulated at the out-of-the-money $135 strike, potentially indicating lowered expectations for Apple stock.
Even short sellers are getting in on the act, which is an unusual development for AAPL stock. During the most recent reporting period, the number of Apple shares sold short rose by 4% to 52.9 million. While this accumulation still represents only about 1% of AAPL’s total float, the rise itself is notable on a stock that typically sees overwhelmingly bullish sentiment.
Finally, the brokerage community remains heavily bullish, as usual — and this could be a bad thing for Apple stock.
Currently, Thomson/First Call reports that 36 of the 47 analysts following Apple rate the shares a “buy” or better, leaving plenty of room for potential downgrades — especially on valuation concerns with AAPL trading just shy of the consensus price target of $147.61.
Returning to Apple stock options, 28 April implieds are pricing in about a 3% move for AAPL ahead of expiration. That places the upper bound near $147 and the lower bound near $139. With Apple stock unable to make any headway with resistance near $145, a short-term pullback to $140 or below seems likely ahead of early May’s quarterly earnings report.
2 Trades for AAPL Stock
Put Spread: Those traders looking to profit from a short-term correction in Apple stock might want to consider a 28 April $140/$143 bear put spread. At last check, this spread was offered at 88 cents, or $88 per pair contracts. Breakeven lies at $142.12, while a maximum profit of $2.12, or $212 per pair of contracts, is possible if AAPL closes at or below $140 when 28 April options expire.
Put Sell: If you’re not willing to bet directly against AAPL stock at this point, then a more neutral play may be more to your liking. The 28 April $138 put stands a good chance of finishing out of the money, and was last bid at 44 cents, or $44 per contract.
As always, the upside to this put sell strategy is that you keep the premium as long as Apple stock closes above $138 when 28 April options expire. The downside is that if Apple trades below $138 ahead of expiration, you could be assigned 100 shares for each sold put at a cost of $138 per share.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.