How To Play Apple Over The Next Several Months

| About: Apple Inc. (AAPL)

One thing I have learned in all my years of investing is that the long-term chart of any stock gives us clues as to whether the long-term, above-average growth phase cycle of a stock is over or not.

Granted, you cannot use technical analysis to make long-term predictions. But the charts can tell us what has happened in the past and what is happening today, but even today is relative, because the market is a discount mechanism, discounting what will happen in the future, not what is happening today. So today's price does not portray what is going on today, but what might happen in 6 to 12 months from now.

As such, the market is always one step ahead of us. This means that this correction might mean there is something actually wrong with Apple. And minor issues that many investors are overlooking might turn out to be something big, according to Mr. Market anyway.

For example, the fact that Apple (NASDAQ:AAPL) has delivery problems might be a compliment to some companies, but what happens when you can't deliver what you said you would, but the market has discounted that you should? Due to this, analysts have reduced their guidance for now. Maybe this is a one-time event or maybe it isn't. The market is waiting to find out.

Also, as I have written in other posts, I don't think double-digit growth is in the cards for Apple after a few quarters. There are already 1 billion iPhones out there. How many more people on the planet have the purchasing power to buy another iPhone?

And what about the fact that Apple doesn't offer long-term guidance? Yes, while things were good and earnings were great, no one really bothers to question these things, but when the earnings goings get tough, suddenly it's on everyone's mind.

Below you will find a chart of Apple. If Apple continues growing as it has over the past five years or so, then that will be reflected in its long-term stock price. Charts, however, do not always reflect the long-term growth trend correctly because many times there are distortions in the picture. Such distortions tend to create the illusion that something else is happening, rather than what is actually happening, and tend to confuse investors when making investment decisions.

Many factors go into bringing about such distortions that confuse us in the short term. In the case of Apple, one of those distortions might be the result of Fed intervention. Another factor might have to do with the overwhelming positive sentiment of market participants pertaining to the upcoming launch of the iPhone 5 and other Apple products.

Buy the rumor and sell the news is something that market participants with long-term experience know all too well how to exploit. That's especially true for stocks that every single major investment banking house and hedge fund manager follows, in addition to just about every individual investor on the planet.

It is only natural that any stock with such a following will, from time to time, deviate from its long-term trajectory, caused by positive (or negative) sentiment noise or central banking actions, only to revert to its mean at a later point in time. While no chart will tell us what will happen in the future, it will tell us where we are today.

In the chart below we see evidence of this behavior. Apple's stock literally went ballistic in the beginning of 2012 and deviated from its upward long-term trend. If my logic is correct, Apple's stock will revert to its long-term trend once again, assuming that nothing has changed in the company and also assuming the dust from all the excitement has settled.

Click to enlarge image.

If my logic is correct, then over the next several months or so, after a series of corrections and rallies, Apple's stock will at some point in time resume its long-term uptrend as indicated by its long-term trendline in the above chart. So for those who have taken my advice so far and sold this stock, a good price to buy it again would be along the path of this long-term trendline. In dollar terms, that means somewhere between $480 and $520 within the next several months or so.

In the past (please read my thesis articles here) I have said Apple's stock will go nowhere and provide very few returns for buy-and-hold investors at these levels (from the $700 mark). If my thesis turns out to be correct (and if I may say so, until now I think it has been), my prediction is that the stock will be going up and down along its long-term trendline. Unless you are able to buy the stock along this trajectory (meaning somewhere along the trendline), you will probably not make much money. That's why I have said that Apple will be a good swing trade stock, rather than a buy-and-hold stock.

On a longer-term basis, Apple's stock price (assuming that nothing changes in the long-term trend) will probably reach about $800 or so some time in the next few years. Looking exclusively at the chart above and assuming the long-term trend will continue, that will happen in the next three to four years.

The bottom line is, unless you are able to buy Apple alongside this long-term trendline, you are probably better off swing trading the stock.

Having said all this, however, there is also another observation I would like to make: Under no circumstances must Apple's stock correct to such an extent that it trades below the long-term trendline. Price action below this long-term channel means that something else is going on. In reality, it means that the game is over for Apple's long-term growth prospects.

At the moment I do not have any evidence or clues as to why the stock should correct so much, and, as such, I still think that its long-term growth trend will continue. But because there is a possibility that the stock might trade below this long-term channel, buy-and-hold investors need to take notice of this possibility and thus re-evaluate their long-term exposure to Apple, if such a breach were to occur. I think this possibility is highly unlikely at the moment, but it is always in the back of my mind when confronting charts such as these, for I have learned from experience that you can never say never.

For the time being, however, for those who have sold the stock on my recommendation, I now recommend that they open long-term positions within the next one to two months along the above trendline. In dollar terms, that's somewhere in the vicinity of between $480 and $520.

If, however, by some chance Apple's stock breaches the long-term trendline to the downside, then we will need to re-evaluate all things Apple and see if it is game over for the long-term growth prospects of the company. For the time being, however, that is not my main thesis.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.