Sector rotation was on full display this week. The deck shuffling came as a result of the Street rapidly shifting expectations after the Democrats took both Senate seats in Georgia. Money flooded into a handful of industries expected to benefit from the slate of stimulus and infrastructure bills now very likely to pass congress. Solar, pot and industrials all soared. At the same time, tech stocks sank. And that brings us to our idea for Apple (NASDAQ:AAPL) stock.
If we’ve learned anything during the post-March boom in the market, it’s that sectors never fall out of favor for long. Inevitably, the bull market marches on, pulling everything alongside it. While technology can certainly underperform, it’s extremely unlikely it continues to fall while the rest of the market flies.
Indeed, we saw a microcosm of this over the past two trading sessions.
On Wednesday, the Nasdaq – led by AAPL stock – slid throughout the session. Then, on Thursday, buyers came roaring back. I expect this dynamic to continue, and it makes me believe that buying the current dip in Apple will bear fruit.
AAPL Stock Chart
The weekly chart reveals this week’s drop in Apple was nothing more than a flesh wound. An annoyance? Sure. But it fell far short of changing the trajectory of the bigger bullish picture. As you can see below, the series of higher weekly pivot highs and lows continues unabated. The past two weeks haven’t even come close to returning prices to the rising 20-weekly moving average. In addition, we found buyers right where you’d expect us to at old resistance.
It’s also worth noting this was a retracement preceded by a new all-time high. The first dip after a new record is usually a buy. As far as the daily time frame goes, the uptrend remains intact. Wednesday’s whack took us below the 20-day moving average giving some cause for concern, but the speed at which buyers returned yesterday was encouraging. With prices set to gap higher today, it’s fair to say the pivot low is in and higher prices are now in the offing.
To summarize, Apple dipped to support, buyers emerged, and we have confirmed the next advance has begun.
What’s not to like?
Call Spreads Look Promising
The next earnings announcement is slated for Jan. 27, so traders have a few weeks to play before overnight uncertainty arrives. Implied volatility has already started to creep higher in anticipation of the event and will likely continue climbing. That gives me a bullish bias on options premiums, making long calls or call spreads attractive.
I’m sticking with a bull call spread for two reasons. First, it’s a lower cost than a straight call option while still offering a handsome reward. Second, it hedges our time decay risk in case AAPL stock takes longer than anticipated to rise toward the target.
The Trade: Buy the Feb $135/$140 bull call spread for $1.75.
Your maximum loss is $1.75 and will be forfeited if AAPL sits below $135 at expiration. To minimize the damage, however, you could exit on a break of this week’s low ($126). If prices rise past $140 by expiration, your max gain is $3.25. That translates into a tasty 186% return on investment. If you want to increase your odds of escaping with a profit, you could always exit early if we but touch $140. This also might allow you to bail before earnings if you don’t want to brave the drama.
On the date of publication, Tyler Craig did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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