Chart Of The Day: Apple’s Big Drop No More Than A Buying Dip?

Chart Of The Day: Apple's Big Drop No More Than

After starting the week by undergoing a 4:1 split, which pushed its already soaring shares to a new record, Apple (NASDAQ:) slumped yesterday, even as the saw it’s biggest jump in nearly two months. It appears investors are cashing out of highly valuated stocks, in favor of shares that were not anointed market darlings during the early months of the pandemic.

The move could be viewed as driven by the confluence of two fundamentals—the belief that Fed liquidity will prop up stock prices and together with a potential vaccine should return markets to normal, providing non-tech shares much more room to grow.

Indeed, the disparity between the technology sector and the broader market is significant: the S&P 500 Index is up 10.8% YTD, while the has been boosted by 42% over the same period, almost 4 times that of the broader market. And of course, having added up to 87% in value prior to yesterday’s setback, Apple sits at the top of the pyramid of the US’s most highly valuated companies, with a market cap upward of $2 trillion, the first US company to hit this mark.

The fact that Apple achieved this milestone during the worst global pandemic in 100 years is a testament to the iPhone maker’s ability to sell its products even amid disruption and economic uncertainty. Yesterday’s plummet notwithstanding, the stock is still up 75.6% YTD.

Moreover, though JP Morgan analysts think “investors have widely acknowledged the rich valuation of Apple’s stock,” the bank still sees room to run for the shares. JP Morgan increased its price target to $150 from a split-adjusted $115.

So, was yesterday’s drop a game changer for the stock? Possibly, but we can’t know that for sure at this point.

While valuations do certainly matter in the long-term, Apple is still very much in an uptrend, and until it reverses, odds are it will continue pushing higher. So, from a trading perspective, we consider what happened yesterday to be a buying dip.

As dramatic as yesterday’s drop was, it found support both by a pennant—bullish after a $13 jump within three sessions—and the bottom of its rising channel since July 24.

Note that volume spiked amid the preceding rise into the pennant shaped range, in which fresh bulls replaced tired but satiated bulls who wanted to cash out. Yesterday’s slump occurred on considerably lower volume, demonstrating which direction attracts wide participation, and where the oomph actually is, which is toward the upside.

A sharp return move after a breakout of a continuation pattern is classic, as the initial outburst ignited by a short squeeze and numerous buy orders awaiting a breakout are triggered, and then cashed out. As such, we consider this only a buying opportunity.

Trading Strategies

Conservative traders may want further proof of prevalence of demand with at least one long green candle, if not for the price to take out yesterday’s long red candle.

Moderate traders may wait for that reaffirmation of support but may also go in with a deeper dip, willing to risk the small exposure, having neared the support of the pennant.

Aggressive traders are likely to enter immediately, as they manage the impact of their timing on a risk-reward ratio that suits their tolerance. 

Aggressive Trade Sample

  • Entry: $130
  • Stop-Loss: $127
  • Risk: $3
  • Target: $139 – pattern’s implied target
  • Reward: $9
  • Risk:Reward Ratio: 1:3

Author’s Note: This trade may fail. If your account or temperament can’t withstand this loss, don’t trade it. We can’t know if it will be successful. We’re simply betting on the odds that the usual market dynamics will play out.

We accept that some of our trades will lose and aim for our overall trading to cover these losses and incur a profit. Therefore, only enter a trade whose risks you understand and accept and can manage to live to trade another day…or 10.

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