SSS - AAPL Potential LSFB Short-Sale Set-up: Chart Analysis

Published : June 6 2011 at 16:58 ET

AAPL is in its third long-duration base since the market lows of March 2009. When we speak of "long-duration" bases we are referring to the 4 1/2-month structure extending from October 2009 to March 2010, the 4-5 month structure extending from April to September 2010, and the most current one which began in February of this year, as the weekly chart below shows. AAPL has emerged from the last two long-duration bases, and we could consider this current one to be a much more late-stage situation by definition. Whether it results in a significant downside move from here, e.g., 30% or more, has yet to be determined.

What is obvious to the crowd here is the fact that AAPL is "cheap" on the basis that it sells at 14 times forward estimates. Whether it is cheap or not depends entirely on where it goes from here. We might argue that since AAPL's low forward-PE is so obvious, why then isn't the stock rocketing to the upside? Is it the Steve Jobs-health-uncertainty discount? One can never know for sure, but it is possible to wonder out loudly why the market places such a low value on AAPL's future earnings stream, which is more in line with how we interpret and look at P/E ratios: as a measure of the market's demand for a particular company's future earnings stream.

On a daily chart, below, we can see that AAPL attempt a trendline breakout four days and failed on sharply above-average volume. This can be interpreted as a late-stage breakout failure. Today we saw the stock try to rally up off the 50-day moving average on all the hype and hoopla of today's Apple Developer's Conference, but the stock ultimately reversed hard on the day with volume again picking up and trading above-average. At this juncture, all we know for sure is that the stock is giving us a short-sale sign as a potential Late-Stage Failed-Base short-sale set-up and all we can do, if we choose to, is play the signal. Thus, we believe this represented a low-risk entry for a short-sale position in AAPL, with a very near upside stop either at today's high at 347.05 or the 50-day moving average at 342.17.

 Some factors working against AAPL, in our view, are its Relative Strength of 69 and the fact that the crowd knows AAPL is "cheap" as the unquestioned consumer technology leader and juggernaut stock of the New Millenium. Regardless of what the crowd knows, what we know is that leading stocks, even the best of them, will top when the story and the fundamentals are the rosiest.


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