Why Apple Is Still A 'Don't Buy'

| About: Apple Inc. (AAPL)
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In an article from early October, I discussed why Apple's (NASDAQ:AAPL) stock was not a "Buy" and the role that the 200-day simple moving average has played in providing support for the stock over the past few years. I also noted that "it is only a matter of time before Apple's stock eventually tests the 200-day moving average again."

It can be quite frustrating for those who make investing decisions purely based on fundamentals to watch their stocks be driven by technical trading. But the role of technical trading is well-entrenched in today's stock market. Moving averages and support levels play important roles in determining where share prices go. And Apple's stock is no exception.

Immediately after the company's most recent earnings report, the stock did indeed find support right at its 200-day moving average. Remember that prices from after-hours trading will not show up on a daily chart of most investing software. Therefore, those investors who focus on the daily chart may not realize that the stock did indeed have yet another rendezvous with its popular support level. Now that the stock has tested the moving average that has held as firm support for more than three years, is the stock a "Buy"? Not yet.

As I mentioned in the article linked above, Apple's stock was sitting in no man's land in early October, trading below its important shorter-term moving averages (providing resistance) and above its important longer-term moving average (which provides support). Today, Apple is still trading in no man's land and remains a "Don't Buy." The key to longer-term investing success is patience. And at the moment, patience is warranted with respect to Apple's stock.

Apple's 20-day simple moving average is currently trending strongly downward. It sliced through the 50-day moving average on October 17 (short-term bearish signal) and currently sits at $636.68. The 50-day simple moving average peaked on October 22 and is now slowly heading lower (short-term bearish signal). It currently sits at $660.01. While there will certainly be opportunities to trade Apple's stock between the $587.85 (200-day moving average) and $660.01 (50-day moving average) levels, for now, investors with a longer-term time horizon who are interested in putting new money to work in Apple's stock should wait.

As the 20-day, 50-day, and 200-day moving averages continue to converge in price, the stock will get pressure from both directions, forcing it into an ever-narrower trading range. Eventually it will firmly break out of that range in one direction or another, and that breakout will dictate what investors should do. A firm breakout above the short-term moving averages would be a signal to buy, and a breakdown below the 200-day moving average would be a signal to wait to put new money to work. A solid breakdown below the 200-day moving average would also be a signal to sell out-of-the-money covered calls or buy protective puts (for those who currently own the stock).

For now, exercise patience. Giving up a few percentage points on the upside to eventually be more confident in a sustained rally will be worth it in the long run. Likewise, not jumping at the opportunity to buy Apple roughly $100 off its all-time high will be worth it if the stock fails to hold its multi-year support at the 200-day moving average. If you are an institutional investor who is trailing your benchmark and cannot afford to wait (with the end of the year fast approaching), as I mentioned in my previous article, selling puts still remains the best option for you. Focus on December in-the-money puts, allowing yourself the possibility to capture decent upside should the stock rally while also realizing a lower cost basis if the stock breaks down and you are ultimately assigned shares of Apple.

Also, if you are a shareholder in any companies that have an interest in Apple's continued success, such as Cirrus Logic (NASDAQ:CRUS), Qualcomm (NASDAQ:QCOM), and Broadcom (BRCM), you should pay close attention to Apple's share price performance. The same goes for investors who hold shares of the popular PowerShares ETF tracking the Nasdaq 100, ticker symbol QQQ (Apple has a nearly 20% weighting in the ETF). After all, the support and resistance levels that help to drive Apple's share price are a reflection of the prices at which shareholders find value or a lack of value in the company's stock. If shareholders push the stock through those levels, in either direction, it will express an opinion about Apple's future business that shareholders in the aforementioned companies (and ETF) will absolutely want to take note of.

Finally, if you prefer to focus on the fundamentals as a key determinant of buying or selling Apple, let me add this: After two quarters in a row of disappointing earnings reports, and the latest string of product upgrades already announced, there is unlikely to be a company specific fundamental catalyst for taking the stock to new highs in the near future. Investors will receive clues on the strength (or lack thereof) of holiday shopping later in the quarter and that could help the stock break out to higher levels. But when a company disappoints on earnings for at least two consecutive quarters, patience is warranted. Investors can come up with all the excuses in the world for the earnings disappointments, but results relative to expectations matter in the world of equities. For fundamental catalysts to drive Apple to new all-time highs, and for the stock to experience multiple expansion, it will need to prove to Wall Street that it can once again blow away the earnings estimates. It will have that chance again in a few months. Until then, remain patient with your money.

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.