Buy Apple on an Earning's Miss

01/27/2015 10:15 am EST

Focus: STOCKS

Thomas Aspray

, Professional Trader & Analyst

A lot of focus is on this tech behemoth that reports earnings after the close today, so MoneyShow’s Tom Aspray uses multiple time frame analysis to determine if the worst of the correction is over and if there’s now a good buying opportunity. 

The stock market held up well Monday as the market internals that were negative early closed 2-1 positive. The NYSE A/D line has turned sharply higher and moved well above the November and December highs. It is again acting stronger than prices. Stocks are getting hit hard in early trading with the S&P futures down well over 20 points in reaction to earnings from Microsoft (MSFT) and Procter & Gamble (PG).

The energy stocks again led the market higher Monday as the Philadelphia Oil Service index gained 1.88%. The Russell 2000 was up just under 1% while the S&P 400 mid-cap did slightly better.

In this earnings heavy weak, much of the focus is still on Apple, Inc. (AAPL), which reports after the close today. The Nasdaq 100 was down slightly Tuesday, but after last week’s strong gains, it is not far from an upside breakout, which would just require a rally of just over 1%.

The expectations for Apple’s earnings are high with many fundamental analysts looking for earnings of $2.60, which would be a 10% increase over their September results. Many are trying to predict how many iPhones will be sold and sales in China are expected to jump sharply.

I have no idea what the earnings will be, but the analysis of the monthly, weekly, daily, and the intraday charts strongly suggest that the worst of the correction in Apple’s stock is over. A drop on an earning’s disappointment should, therefore, be a good buying opportunity.

chart
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Chart Analysis: The monthly chart of Apple, Inc. (AAPL) shows that the starc+ band was tested in November before the recent pullback.

  • The starc+ band is now at $126.30.
  • There is important monthly support in the $92-$95 area, with the uptrend, line a, in the $86 area.
  • The monthly relative performance moved above its WMA in April 2014.
  • The RS line made a high in November and is well above its WMA.
  • The monthly OBV also moved above the 2012 high, line c, in April.
  • It is close to making a new high in January and is well above its rising WMA.

The weekly chart of AAPL shows that, over the past three weeks, it has tested the monthly projected pivot support at $104.58, line d.

  • The weekly starc- band is now at $100.12.
  • The weekly relative performance dropped below its WMA at the start of 2015.
  • It made a significant new high in November along with prices.
  • The RS line is now back above its WMA and close to moving back above its recent high.
  • The weekly OBV held above its WMA on the recent correction.
  • It is also holding above the support at line f.
  • The quarterly pivot support is at $108.30, with the rising 20-week EMA at $108.11.

Next: Daily and Intraday Charts of Apple to Watch

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chart
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The daily chart of Apple, Inc. (AAPL) shows that the downtrend, line a, was overcome last Thursday.

  • This completes the flag, or continuation pattern, which projects a move to the $120-122 area.
  • The 127.2% Fibonacci retracement target at $123.92.
  • The break of the downtrend has been confirmed by the daily RS line which has also moved above its resistance at line b.
  • The daily OBV made higher lows last week.
  • It then completed its bottom formation on Friday by moving through the resistance at line c.
  • The former downtrend (line a) and the now rising 20-day EMA are in the 110.52-$111 area.
  • There is next daily chart resistance at $114.77.

The completed continuation pattern is also clear on the 240-minute chart of Apple.

  • The 50% retracement support of the recent rally is now in the $110 area.
  • The starc- band is at $109.22 with additional support in the $107 area.
  • The intraday RS analysis has also completed its bottom by breaking its downtrend, line f.
  • The OBV has been in a clear downtrend since it peaked the afternoon of December 9.
  • The downtrend in the OBV, line g, was broken on the close last Friday.

What it Means: The multiple time frame analysis of the RS and OBV for Apple, Inc. (AAPL) are all positive meeting the requirement of the A Six-Point Checklist for a Profitable 2015. The key missing ingredient now is the low risk entry point.

Apple, Inc. (AAPL) closed at $113.10 on Monday and is trading a bit lower before the opening. A 5% risk would mean a stop at $107.50 or a bit lower. This could work as—from the chart formations—a pullback could hold the $110-$111 area.

However, the continuation pattern does allow a full-fledged test of the lows in the $104.63-$105.20 area before the bottom is complete.

Therefore, I have two suggested ways to play this: For stock traders, would take a position in the stock even in after hours if the recommended levels are reached. Option traders should use limit orders on the March $105 calls, which closed at $10.53.

If, instead, the stock accelerates to the upside from current levels I would look to buy on the first pullback.

How to Profit: For Apple, Inc. (AAPL) go 50% long at $110.72 and 50% at $108.58 with a stop at $103.89 (risk of approx 5.2%).

Option traders buy the March $105 at $8.88 or better. Sell on a daily close below $104.

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