Is Apple's Stock Headed for a Reversal?

I’ve written extensively about Apple this past year. And, not without reason. Investing in the stock has been a very fun ride ($89 – $200 in a little over 6 months). The Company, whether it be delighting users with new products or frustrating users with its mismanagement of the iPhone app approval process, has managed to stay in the headlines and, as a result, remains a plentiful mine for content. Because Apple (AAPL) has a contentious group of zealous fanboys, let me start with my Apple Investor Disclaimer and then get on with the post. This is specifically for mac fanboys, so those who have an open mind and understand how one can have a differing views of a Company and the Company’s stock valuation, just skip the blockquote below.

I, the author of The Curious Investor, am currently long Apple stock. In fact, it makes up nearly 10% of my personal portfolio. In my apartment are multiple Apple products including several iPhones, several iterations of the iPod, a MacBook, and an Airport Express. I believe Apple is more than just a trendy consumer products maker and that the iPhone truly represents a new growth engine as the world embraces mobile computing. As an investor, however, I understand that stocks do not only move in one direction. Valuations will overshoot and undershoot true value in the short term and a prudent investor must be aware of this and make decisions with this phenomenon in mind. It is possible for a great company to possess a not very great stock valuation (see: CSCO circa 1999-2000). So, please, leave your hate mail unsent.

Take a look at the chart below (click to enlarge):

Apple’s stock gapped up through the psychologically significant barrier of $200/share following Apple’s earnings announcement last Monday. A headline related pop typically signals a breakaway gap, a stock gap which is typically followed by a continuation but, in this case, Apple’s gap was more suspicious. While related to good news, Apple’s Q4 2009 (FYE 9/26) results were not so much of an upside surprise as previous quarters and investors all but dismissed another characteristically conservative guidance. Moreover, volume doubled prior to the gap up and remained elevated during the stock’s near immediate fall over the last five trading periods, a tell tale signal of an exhaustion gap.

Exhaustion gaps are defined as stock price gaps which follow in the direction of the prevailing trend. A textbook exhaustion gap should be followed by a reversal soon after the gap and then move to fill the original gap. A reversal is confirmed when the gap is filled and price breaches the level prior to the gap.

I realize that I may be early to call this reversal. After all, technical analysis is not clairvoyance. Trends and reversals must be confirmed through chart movements as opposed to “predicted” by the apparent formation of patterns. Traditional technical analysts will always miss the exact top or bottom of a price movement in preference to investing with the certitude of a confirmed trend or reversal. As such, it would seem that the seeming formation of an exhaustion gap here is just a red flag. Apple’s stock has yet to fill the gap, but it has breached the initial gap and looks to be on its way to filling the gap. If so, could it be possible that the Company’s stock is headed for a reversal of its uptrend? Or, possibly entering a consolidation period following an aggressive upward move? If so, it may be time to take some gains off the table and wait for a re-entry point.

Full disclosure: Author is currently long shares of AAPL.

Comments

[See through it:]

A recent hedge fund closed in the last week that was implicated in insider trading had a very large APPL position that was dumped into the market creating a one time event that lowered the stock price and increased trading volume. Therefore, considering the unbelievably STRONG FUNDAMENTALS (Cash earnings grew by more than 50% YOY in the last 4 quarters) and LOW VALUATION (less than 20X trailing earnings and over $30 per share in cash), it appears that APPL has plenty to run. Oh, and I forgot to mention the upside that remains in the addressable market for Apple's products... Apple has approximately 3% of the worldwide cell phone market and 6% of the PC market. Oh, and then there's future products, like the tablet, etc. I guess I'm just another fan boy without any facts or logic :)

Oct 30 07:42 AM

[Julian Ivan...:]

AAPL has been bouncing nicely, all year, along a strong uptrend line and continues to bounce off it ever time it pierces the 20-DMA.
RSI had also dipped concurrent with this pullback from that dash to $208 to levels from which it also usually stages a strong rebound.
Lo and behold, when the stock Wednesay broke through the 20-DMA it then went on to tag the uptrend just about $190, and bounce hard to close at $196.35.
This potentially clears the decks for the stock to now attract new money after all the profit takind drovw the stock down almost $20 from its high post-earnings, as the inevitablity of an absolutely blow-out quarter of mind-bending magnitude sinks in to even the most skeptical investor.
Sure if the market tanks, AAPL will pull back, but with the comnpany increasing manufacturing orders for iPhones by 20% only a week or two ago, there's no reason to doubt that this company is totally recession proof any more. Its performace over the last year is testament to that.
And then there's that China launch, which wil add several million sales this quarter.
And the impending reporting of earnings without the deferred revenue/subscription accounting method under-reporting true EPS by 30-40% every quarter, which I think will be first introduced in Q2 10, with guidance for Q2 given during the Q1 report in January given by the company using this new approach. Q1 earnings don't need boosting by changing accounting methodology, but considering AAPL always gets hammered by appaling and consistently 20-30% low guidance for Q2 off the back of the usual blowhards and bears, by changning accounting to a non-subscrition-based method for Q2, they will be able to "beat 'em and raise 'em" through the roof.
This January could see the opposite of the usual AAPL trade - an incredible eye-watering rally - if the company chooses to use the folloowing Q2 as its changeover quarter for its accounting methodology. The guidance for Q2 would be simply staggering.
So yes, you could have a point and caution is merited, but an analysis of AAPL's TA actually presents a case to be bullish, not bearish, *providing the broader market doesn't pull back sharply as so many expect*.
If you're bullish on the market, you should be in AAPL up to your neck.
If you're worried the market has topped, get out, now. In fact you should have gotten out when it spiked over $200. This is a market call, nothing to do with AAPL. Lets keep that in mind when analysing a stock shall we?

Oct 30 07:47 AM

[rcprofit:]

Demand is definitly there. I would love to buy an iPhone but refuse to switch to at&t's network (I am sure there are others like me out there). Where are the iPhones produced? Does Apple have it's own factories? They are going to need to ramp up production!

Oct 30 08:17 AM

[The Curious...:]

Again, I am fully aware of Apple's fundamental value. If not, I wouldn't hold it. I think it's perfectly reasonable, however, to take a realistic look at how the stock trades. No stock trades in one direction only, at least in the short term. Is it not inappropriate to take profits and enter again at a better position.

Galleon had $7 billion under management. At $200/share and with average volume near 20 million shares a day, I don't believe Galleon could be entirely responsible for Apple's stock movements in the past weeks. It's an interesting point, but there very likely could be stronger forces at work.

Oct 30 08:38 AM

[vassar:]

ATT's network has been unfairly getting a bad rap.

I switched from Verizon to ATT and have been completely satisfied with ATT.

Actually, ATT's network is better than Verizon as it allows simultaneous voice and data, something you can not do with Verzions antiquated CDMA network (to be replaced by LTE in a few years)!


On Oct 30 08:17 AM rcprofit wrote:

>...refuse to switch to at&t's network..

Oct 30 08:44 AM

[Stefan Sida...:]

As already stated, this is not about valuation, but about technical performance of the stock. I agree that the stock may have reached a technical top and there is a good possibility for a pull-back. What is missing here is the connection to the overall market trend. Apple's stock appears to be following the market (for now) and I agree with Julian's comment:
"If you're bullish on the market, you should be in AAPL up to your neck.
If you're worried the market has topped, get out, now. In fact you should have gotten out when it spiked over $200. This is a market call, nothing to do with AAPL. Lets keep that in mind when analysing a stock shall we?"

Oct 30 09:23 AM

[Edge_Jeff:]

Always intrigued by comments like: "mismanagement of the iPhone app approval process".

Apple has approved close to(more than?) 70,000 iPhone apps. No viruses. No Spy wear. When you look at the few who are complaining, you find hackers who offer apps to unlock phones, and access undocumented (not yet supported features). Apples approval process has been extremely well managed, and you shouldn't let the whining of second rate, or worse programmers guide you.

Oct 30 09:33 AM

[Julian Ivan...:]

Edge_Jeff
Actually Apple topped 100,000 apps this week :)
Your comments re: the approvals process are very pertinent and media pundits together with disgruntled programmers who often try to shortcut the system or use unathorised APIs to add features to their apps should really just STFU and instead celebrate the biggest opportunity for programers - from massive software houses such as Electronic Arts to a kid in a bedroom - since the days of the beginning of the home computer revolution decades ago.

Oct 30 10:00 AM

[relayer75:]

Galleon's liquidating its position was like pissing in the ocean. More AAPL stock trades on a total dollar basis than any other stock in the US, even the QQQ's. See Barron's volume tables every week. AAPL and the Q's are always #1 and #2. Galleon's position represented something less than 1 hour's worth of trading in AAPL. And we don't even know for sure, because the published Galleon holdings were as of June 30, 2009. 4 months is about 17 lifetimes for most of these rapid fire gunslinging hedge funds, especially the crooked ones. So, maybe the liquidation had a small effect, but certainly not a material one.

Oct 30 10:29 AM

[mollytjm:]

i think your title was misleading, in an otherwise good article, which doesn't read like the title. The Title reads like you think Apple will fall apart, which i don't think you mean.
even really great stocks have some ups and downs and some doldrums and unless you buy and hold (i do) then it's a gambler's game to try and figure out when to move in and out. i just look for dips so i can buy in cheaper.
there's no way to put a cap on Apple's market share for any of it's products, since it's an international company now and just into China nov. 1 with the iPhone. Because it's market share is low in many places, there's enormous room for growth.
And once people own an Apple product, it's pretty hard for them to put up with something else, or to be able to resist the next Apple product. I think Apple will keep making money for us.
long APPL

Oct 30 11:26 AM

[The Curious...:]

Hey Molltjm, Seeking Alpha editors provide the titles for my posts here. On my own blog at TheCuriousInvestor.com, I wrote "Are Apple bulls exhausted?" which is a more technically focused (and maybe more snarky) title.


On Oct 30 11:26 AM mollytjm wrote:

> i think your title was misleading, in an otherwise good article,
> which doesn't read like the title. The Title reads like you think
> Apple will fall apart, which i don't think you mean.
> even really great stocks have some ups and downs and some doldrums
> and unless you buy and hold (i do) then it's a gambler's game to
> try and figure out when to move in and out. i just look for dips
> so i can buy in cheaper.
> there's no way to put a cap on Apple's market share for any of it's
> products, since it's an international company now and just into China
> nov. 1 with the iPhone. Because it's market share is low in many
> places, there's enormous room for growth.
> And once people own an Apple product, it's pretty hard for them to
> put up with something else, or to be able to resist the next Apple
> product. I think Apple will keep making money for us.
> long APPL

Oct 30 11:37 AM

[drdweiss@:]

no one has mentioned the elephant in the room.

buffet is berkeshire/..............


d

Oct 30 11:41 AM

[Mac Daddy:]

Technical analysts believer that "all gaps must be filled" in order for a stock to move permanently higher. Sometimes it takes years for these gaps to be filled, sometimes hours. Apple gapped up from 190 on the earnings announcement and the recent selling in the stock seems to be targeting 190 on the downside. I believe that the stock would see strong buying interest at the 190 level and I am planning my strategy accordingly.

Oct 30 12:09 PM

[a4ism:]

At this moment in time, AAPL is trading for 188.76. So your patience seems to have been rewarded!


On Oct 30 12:09 PM Mac Daddy wrote:

> Technical analysts believer that "all gaps must be filled" in order
> for a stock to move permanently higher. Sometimes it takes years
> for these gaps to be filled, sometimes hours. Apple gapped up from
> 190 on the earnings announcement and the recent selling in the stock
> seems to be targeting 190 on the downside. I believe that the stock
> would see strong buying interest at the 190 level and I am planning
> my strategy accordingly.

Oct 30 12:51 PM

[Infinite loop:]

Since timing the market is a no win scenario in the long run, my strategy is to add to my APPL position when all is bleak and gloomy. I currently own 4500 shares ranging in price from $8, $35, $55, and most recently $83 in March. I've held since 1999 and rode 2 splits giving me most of my shares for free. Why would I sell now while Apple the company, and it's stock, is on fire? I, for one, hope it drops like a rock again so I can buy more.

If I had attempted to time the market would I be sitting on such a huge gain and enjoying making every point possible?..... I seriously doubt it. But what fun is that for an active trader such as yourself, right?

I might add that if Apple is blowing away estimates during the worst recession since 1929 what do you think will happen when the wallets actually start opening up again? And don't forget Apple's best Q is always October to December. I would be looking to add on weakness, not selling.

I wish you all the best.

Oct 30 05:25 PM

[User 230580:]

Technical analysts, fortunately do not run companies. They just try to write silly stories to justify their pay (how about using a horoscope for your evaluations), and editors provide the titles as we are told, with misguided and inflammatory statements, to lure in the readers and create traffic, which is a way of justifying their own pay. None of this has much to do with Apple. Again to our good fortune.

Apple, is so well run these days, as a growing corporation that these management skills alone would single it out for a lot of confidence by investors. Try finding many other corporations that are so well managed, but then lo and behold, they also have such an impressive cash hoard, at a time when most competitors are strapped for cash, that you wonder how someone can sit down and write the nonsense that I just read above. Maybe it's simply the arrogance of considering your opinions so important, no matter what you write about. While you just make evaluations, the management at Apple are actually doing things in the real world to create wealth. I think I will stick with Apple a long time into the future, about your column well I wish you better luck at finding what to write about.

Oct 31 03:11 PM