The selling pressure rising on Wall Street has been particularly acute in the tech sector. Look no further than the Nasdaq for proof. Large distribution days have cropped up over the past three trading sessions. But Apple (NASDAQ:AAPL) is holding firm, and that suggests a relative strength trade in Apple stock may be in order.
To set the stage, let’s begin with a quick take on the Nasdaq using its exchange-traded fund, the PowerShares QQQ Trust (NASDAQ:QQQ). Its failure to make new highs on the last upswing resulted in the creation of an “M” pattern. Otherwise known as a double top, this formation is neutral at best and bearish at worst. The subsequent support breach suffered yesterday on heavy volume makes the weakness particularly worrisome.
Contrast the QQQ’s deterioration with the mildness of Apple’s retracement and the relative strength is easy to see. The three-day retreat in AAPL stock was orderly, returning the tech titan to its 20-day moving average, no further. What’s more, the volume was tame. It lacked the aggressiveness of the Nasdaq’s plunge with virtually no signs of distribution.
Another comparison is the posture of AAPL versus QQQ on the prior upswing. While QQQ failed to make a higher high, Apple stock did.
Throw it all together, and Apple remains a market leader and a bastion of strength in an otherwise weak sector. If you’re inclined to buy this market dip, Apple stock deserves your consideration.
The AAPL Stock Trade
With earnings looming on Nov. 1, Apple stock is already experiencing the implied volatility ramp. In fact, at an IV Rank of 73%, much of the uncertainty is already priced in.
If you’re willing to bet AAPL stock remains firm over the next month, then sell the Nov $210/$205 bull put spread for 75 cents or better. The initial credit will be yours to keep if the stock remains above $205. The risk is $4.25.
As of this writing, Tyler Craig didn’t hold positions in any of the aforementioned securities. Want insightful education on how to trade? Check out his trading blog, Tales of a Technician.
