Apple (NASDAQ:AAPL) stock finally showed some weakness Tuesday after its double-digit move higher off of its January low. Beginning the year with a thud, AAPL stock has now tacked on more than 40 points! While, certainly, Apple’s rally was warranted, considering its previous comparatively cheap valuations, but Apple has come too far, too fast.
Now that the momentum has finally waned, it is time to position for the pullback in Apple stock. Brace yourself.
Apple stock certainly started the year in a dismal fashion. Shares dropped 12 points on the second trading day of the year following a revenue warning from the company. Revenue did indeed come in basically in line with that warning at $84.3 billion versus prior lowered guidance of $84 billion.
Click to Enlarge Yet AAPL stock exploded higher, in essence dismissing the lowered revenue announcement. The stock is now up some 30% since the warning, far outpacing even the torrid gains this year for the S&P 500. This now puts AAPL stock at the highest P/E ratio of the past three months at well over 15 times. Apple is no longer cheap and ignorance is no longer bliss.
The last up-leg in the rally can be attributed to a bullish note out of BAML. The upgrade was attributed to the potential of increased stock buybacks and stability in the global supply chain. No mention of earnings or revenue growth.
Importantly, BAML actually lowered 2020 phone unit sales by 5% and raised 2021 sales by just 2.3%. The net effect? Lower combined two-year phone sales for a company whose flagship product is a phone. Still, Apple stock ripped higher.
Bottom Line on Apple Stock
Click to Enlarge Apple is looking decidedly overbought from a technical perspective. Shares reached a 9 day RSI of over 80 before finally weakening slightly. The prior time AAPL stock reached this extreme marked a significant intermediate-term top in the stock. Implied volatility is also near the lowest levels of the past year, another bearish sign that complacency has set in.
Most importantly, AAPL stock finally had a down day yesterday after seven straight up days. Apple opened higher and at fresh recent highs before reversing course and closing lower on the day. This type of reversal pattern is usually a sign that the buyers have finally become exhausted. This is especially true after such a strong rally like the one in AAPL.
Traders should look to short an overvalued and overloved AAPL stock on any rally now that the upside momentum has finally been broken. Earnings are due April 30 and ex-dividend date is expected to be in early May, so I would cover the trade before then to avoid any earnings or dividend risk.
Options traders may want to consider a short-term put diagonal, buying the March 29 $190 puts and selling the March 22 $187.50 puts to position for a short-term pullback in AAPL stock.
Tim Biggam may hold some of the aforementioned securities in one or more of his newsletters. Anyone interested in finding out more about Tim and his strategies can go to https://marketfy.com/item/options-and-volatility.
