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Trade of the Day: How Deep Can Apple Inc. (AAPL) Stock Fall?

aapl stock - Trade of the Day: How Deep Can Apple Inc. (AAPL) Stock Fall?

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In case you were on internet abstinence since Thursday, the market saw a large-cap technology stock sell-off on Friday. The bears came out of the woodwork and were quick to voice their doom and gloom scenarios for stocks such as Apple Inc. (NASDAQ:AAPL).

Trade of the Day: How Deep Can Apple Inc. (AAPL) Stock Fall?In my eyes, the nearly 4% drop in AAPL stock last Friday is to be respected but in order to make money from the stock and a possible further drop one primarily needs perspective and a straightforward plan.

Large-cap tech stocks have largely been the driver for the broader U.S. large-cap stock market rally thus far in 2017. The growth stories and near monopolistic pricing power of these companies make a great story for institutional investors to buy … no bones about it. From a stock price behavior perspective however the low volatility rise in these names may have hit a best case scenario last week … and then Friday happened.

AAPL Stock Charts

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To give all of this a little perspective, on the first chart I plotted the PowerShares QQQ Trust, Series 1 (ETF) (NASDAQ:QQQ) — which of course contains most of the large cap technology growth stories – versus the SPDR S&P 500 ETF Trust (NYSEARCA:SPY).

This so called ‘ratio chart’ shows that the drop in stocks like Apple resulted in both absolute as well as relative weakness on Friday. In other words, the selling on Friday was not broad based but more focused on large cap growth tech stocks. From a technical perspective we see that so far this relative weakness is just mean-reverting back to the yellow 50-day moving average. One also needs to respect however that a retest of the horizontal support line (former resistance) cannot be ruled out.

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On the multiyear weekly chart of AAPL stock itself, we see that last Friday’s sell-off took hold as the stock reached the very upper end of its up-trending channel, which just shows the stock respecting a well-defined pattern. Here too we see that if last Friday’s sell-off were to morph in to a better mean-reversion period for the stock, then previous horizontal resistance (black horizontal) around the low $130s could become the next downside target.

Such a move would however for now simply be looked at as a healthy consolidation phase rather than a major top for the stock. But this has to be taken one week at a time.

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Lastly, on the daily chart we see that last Friday’s selling clearly and violently snapped the yellow 21-day simple moving average, which broadly speaking had held as a reference are of support for most of 2017.

Such bearish reversals such as what we saw in AAPL stock are important technical signals that can lead to high-probability setups, and for those unfamiliar, I’ll be hosting a special webinar June 15 for InvestorPlace readers to explain these signals and how to turn them into winning trades.

From here, the next area of support comes in at the blue 100-day simple moving average (currently around the $140 mark, which could be followed by a next price target at the aforementioned horizontal support level in the low $130s, which if and when reached could also line up with the red 200-day moving average.

So far, the selling pressure in AAPL stock is just a one-day thing. However, the stock was just downgraded by Mizuho to “neutral” from “buy,”so intermediate-term traders may look to take at least partial profits in long positions in the stock through the lens of healthy risk management. More active investors could look to leg into small short positions using the stock or bear put spreads using options with two months left to expiration.

Check out Anthony Mirhaydari’s Daily Market Outlook for June 12.

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