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Apple (NASDAQ:AAPL) is scheduled to report earnings on Tuesday April 24th. Our analysis is simply to try and match the enthusiasm of the recent price movement and fundamental story of Apple in relation to what has happened in the options markets.

Price action for Apple stock over the past few weeks has been noticeably poor. Not only has it traded down 10% from its April 9th closing high of $636 to $572 today, but it has led the market several times with somewhat dramatic intra-day reversals. Even so, the options market has not yet expressed this same recent bearish opinion on the stock.

We have built a model that shows the option action of Apple. We matched the stock price of Apple (black line) versus a weighted combination of the the call-put volume (75% weighting) and the call-put open interest (25% weighting). We chose this breakdown in the belief that short-term volume holds more importance, so consequently should be weighted higher. Additionally, we changed this custom data series into a 10 day simple moving average (blue line) and 50 day (red line) simple moving average to smooth out the gyrations.

click to enlarge

In this analysis, we are looking at how far the 10 day SMA is above/below the 50 day SMA. What does this show? It shows that 10 day SMA currently sits above the 50 SMA by 28%. Since these data series are positively correlated, a rising 10 day SMA is typically a good sign when looking at the call-put volume and open interest. It's when the 10 day SMA spikes dramatically higher or lower relative to the 50 day SMA that it can then turn into a contrarian signal. We would make that case right now that call buying has spiked too far relative to put buying and therefore left Apple stock vulnerable for a further pull back.

Viewed another way, the color coded oscillator in the chart shows the standard deviation differential between the 10 and 50 day SMA. You can see in 2011 that there were two cases where the standard deviation of the differential between the 10 day SMA to the 50 day SMA was greater than 2.0, and the stock traded down and consolidated for a period of time. At present, the standard deviation currently is sitting at 1.98, which is elevated to say the least.

When running our scenario analysis tool using the past 5 years of data, we have found Apple typically returns -.31% in the first month, +11.66% after three months, +25.76% after 6 months, and +33.21% twelve months later when the 10 day SMA is 28% higher than the 50 day SMA.

The takeaway here is that even though the stock has fallen 10% over the last few weeks and has acted poorly, it does not appear that investors have taken out protection in the options market to hedge against further downside.

In our opinion, this leaves the door open for disappointment in the very short term, but any dip should be bought quickly. Longer term the options market clearly has a bullish bias and we would not be surprised to see Apple halt its stock weakness with an upside reversal day very soon.

Source: Apple Upside Reversal Day Coming Soon