Apple Revisited: How Technical Analysis Can Help Fundamental Investors

Technical analysis often gets a lot of shtick from fundamental investors as something of a gimmick, a Wall Street fable that means nothing to the average investor as long as an that person holds the stock for long enough. However, I am here to show you the value of technical analysis even to the long-term investor and why Apple might actually be showing signs of a quality risk/reward entry point to the long side.

On July 25^th, I wrote an article concerning the short-term weakness that Apple’s (AAPL) stock (trading at $162) would experience over the coming months, and of course, I was absolutely lambasted.

Here are some of my favorite quotes from the comments section:

“What a joke!!! Sorry but Apple will skyrocket.”

“Andy, you are an idiot!!”

“Perhaps we should not dignify Andy's idiocy with our attention.”

and my favorite…

“You should have more market experience and knowledge before you start posting your opinions on a site such as Seeking Alpha. It is the PRUDENT thing to do (you should already know this). It's one thing to have your own personal blogging site, but it's another when the site is highly visible.”

The only thing that I can hope is that these investors had cash sitting on the sidelines to put to work now, because Apple is now trading at much more enticing levels than it was a couple months ago. And the best thing? Apple is still a great company. Yes, the recession will affect them with regards to their margins and overall sales, but let’s quickly look at the fundamentals:

• iPhone 3G: It’s been a blockbuster here in the United States, no doubts about it, and now it’s gone global. I can’t walk anywhere without seeing one of these things. Munster thinks Apple should easily sell 4.47 million iPhones this quarter, up 9% from his previous guess of 4.1 million, and up 299% from the 1.12 million it sold during the September quarter last year. Munster’s analysis on Apple has been spot on for years, and I am inclined to agree with his most recent analysis here.
• Mac Sales: As a college student, I can say first hand that Apple is the dominant player on any campus. They are the “in” thing and I don’t see that changing in the foreseeable future.
• Steve Jobs: He comes out and declares his good health. Nice.
• The Numbers: The big focal point of this company has to be its balance sheet. Apple is swimming in cash, $20 billion of it to be precise. And in an economy where credit/loans are near impossible to get, Apple has a great strategic advantage in that they don’t need any money. Furthermore, this stock is trading at a P/E of 25. Now, this is a stock that has traded at near these same levels almost seven months ago, making it almost cheaper now than it was then, another strong case for the bulls.

And now, let’s look at the chart to see not only how we got to Apple’s current position, but also to see if we can get a better idea of where this one is headed into the coming months:

The key to noticing that Apple would be subject to some immediate short-term weakness was to observe that in the month of May, Apple repeatedly failed to break past that $190 resistance area. Each time it pulled to within touching distance, the stock sold off hard. Not soon after, the stock sold off through the 50-day average, which for many traders, is considered to be a very bearish move. And finally, the killer blow: Apple blew through it’s 200-day average on heavy volume and the short trade was confirmed.

In the month of August, we saw a very nice rally in Apple off that $155 area. However, the acute investor would have noticed that this rally was on very low volume, meaning that the hedge funds, mutual funds, etc. were not putting their money on this rally whatsoever. Ideally, one would have again been able to get short of this stock around that 50-day average and continue to ride it down.

Today, we are sitting at around $125 and change. There is a very well defined support level at $120 and any new long positions in Apple have a very nice risk/reward ratio in this area.

So for all you Apple lovers out there, now it might be time to start loading up. And just a quick disclaimer: this article is being written on a new iMac and in all honesty, I just can’t say enough about what a beautiful computer this is: sexy, simple, and just a pleasure to work with.

I’ve been on the Apple train my entire life and love their products, but I won’t let my love for those products blind me into paying a premium for their stock price. Just a quick technical analysis of Apple’s chart would have prevented that from happening.

In concluding this article, I would like to encourage individual investors to learn some basic technical analysis, even if it is just a little. At the end of the day, you will sleep better and you will most likely be on the winning side of more trades in the future.

Good luck.

Disclosure: I have no positions in the companies disclosed.

Comments

[tradeforkeeps:]

As the saying goes, a fool and his money are soon parted. One can only hope that the silent majority listened, because that noisy majority are poorer today.

2008 Sep 29 01:06 PM

[tradeforkeeps:]

That is, the noisy minority (the commenters), who just happen to make up the majority of comments.

2008 Sep 29 01:08 PM

[Timeline St...:]

Let's see, perhaps it's raining because my umbrella is open....or perhaps my umbrella is open because it's raining.

I love it that the technical analysts are all out now saying that they predicted this. Predicted what exactly? That the US stock market would retract nearly to the point of collapse due to massive delevering in the financial sector? Or that the little set of squiggles next to the peak - or even worse, a Bassian 'Black Candle' - foretold of some ominous event to come?

As I look through your past articles, you are accurately bearish on the stock's direction, but only from Apple financial indicators, not from any underlying macroeconomic trends, and certainly not any prediction of what is an unprecedented market meltdown. Your coin flip was correct here, but it's still not science.

2008 Sep 29 01:26 PM

[Fishy9900:]

TimboM [phone]

2008 Sep 29 04:00 PM

[Oh Blah Dee...:]

Apple's stock price is now being determined by MACRO-economic factors. That is, the U.S. and world economies are slowing. However, I believe Apple is still growing, and growing much faster than its competitors.

Apple's iPhone is bringing in an all NEW revenue stream. Apple's computers are about to be updated, possibly have a new addition, and may be better priced.

Over 250,000,000 computers will be sold next year, even with down economies, and I believe Apple's computers will gain market share.

Finally, Apples margins are still expected to be +30%, an enviable number. Apple stock is extremely attractive for those who can stomach the market volatility and world-wide slowdown.

Apple is not a FINANCIAL disaster as is the banking system.

2008 Sep 29 05:14 PM

[Jon T:]

OK so you were right clever clogs!

But, I still maintain that the Mac/iPhone/iPod OS X platform is going to increase its rate of growth compared to the market throughout this period of turmoil. The internet is so fundamental to life today that comments like yours about the iMac are what are selling Mac versus PC.

And if it does maintain its record breaking growth the current valuation is just plain wrong. In fact it's criminal!

2008 Sep 30 08:18 AM

[Vox Rationalis:]

As the author said*, "technical analysis is a gimmick, a Wall Street fable that means nothing."


* Quotation blatantly taken out of context for comedic effect.

2008 Sep 30 10:41 AM

[Bobby Baklava:]

I agree with all the points OP states about AAPL. However, TimboM also makes a very valid point that the OP completely ignores.

I was long AAPL naked calls and got wiped out. I was waiting for AAPL to hit 120 as a test level to decide whether I would unload my position. I didn't even consider the bill being denied on the first leg. Although I lost almost everything on the AAPL calls I still netted profit from my long GLD position yesterday.

2008 Sep 30 01:12 PM

[User 240458:]

This article doesn't have me convinced that this stock is going to climb up in the short run, unless driven by positive economic news. I too am a Mac love and have been blind-sided by it. The facts were splattered on my face and I still didn't sell.

Both Dell and RIMM earnings and forecast report were weak and could be looked at as direct competitors to Apple. Apple is fairly hip and "in", but so is RIMM. Kids are buying these phones just to use the Blackberry Chat feature and look how they did. However, if no economic rescue package is passed prior to Apple's earning report, I believe the stock will hit the low 80's. Apple have been low-balling their forecast and the stock takes a brief beating, but be more worried about this quarters earnings. They might barely meet their projections.

I might be wrong, since they didn't substantially cut prices on their new iPod lineup, but they also diverted from their plans with the iPhone in Hong Kong and decided to sell unlocked phones.

If the economic rescue package is passed before earnings, I expect a jump, but will quickly evaporate after their earnings.

My plan is to sell half my positions a couple of days prior to their earnings release and repurchase them after.

I'm open to any insults now.

2008 Sep 30 05:26 PM

[veryold:]

Apple was at $188 just briefly a month or two ago. My entry price. I expected it would continue to climb so I didn't sell. I doubt we will see that level again very soon. Probably not in my lifetime.

2008 Sep 30 08:02 PM

[kk3:]

I was long on Apple, and I still can't believe the price of such a fundamentally strong company can go so low so fast, all within a month or less. However I have to admit that technically it is not looking good at all, in fact I don't see any bottom right now. I intend to stop looking at this stock for 1 year til all these crazy panic sale stops and the economy, hopefully turns more rational and sane.

2008 Oct 06 04:31 AM