Apple's Pending Breakdown Could Lead to Fast Profits in This Small Cap

By
A A A

One way to put lessmoney at risk to play Apple (Nasdaq: AAPL) is via its suppliers. When deciding which one, traders need to be selective and choose one with a decentpositive correlation to Apple's stock price.

iPhone chip supplier Skyworks Solutions (Nasdaq: SWKS) is one such stock and my pick for playing Apple with moreleverage . The stock has abeta of 1.46 versus the S&P 500, whereas Apple more or less is themarket with a beta closer to 0.93.

On the charts, the stock looks eerily similar to Apple and has reached or breached several key Fibonacciretracement levels that currentlyoffer good risk/reward for a short-side trade for a 12% gain.

A simple look at the correlation between Skyworks (yellow line) and Apple (blue line) pretty much sums up all we need to know.Note , however, that the positive correlation hasn't always been this high. In 2011, for example, Skyworks rallied much more than Apple, before coming back down to earth toward the end of the year.

From a longer-term perspective looking back to 2009, nothing hugely significant sticks out on the weekly chart, except maybe an oversimplified uptrend line that still lies below the market.

From the December 2011 lows to the September 2012 highs, Skyworks has failed at all the important Fibonacci retracement support lines, including what in my book is most often support of last resort -- the 61.8% retracement level.

Since early November, the stock has now dipped below the $20 mark on three separate occasions, each time followed by a bounce. Given what I see in the following charts, however, I expect thesupport level near $19.25 to ultimately fail.

Just as I measured the Fibonacci retracement move from the December 2011 to September 2012 swing on the previous chart, in the following chart I am measuring the move lower from the September 2012 highs to the November 2012 lows. 

On Dec. 6, Skyworks had retraced 38.2% (an important Fibonacci number) of said move, and again changed course to the downside, where it then retested the early November lows. The more often any given level of support/resistance gets tested, the more meaningful its eventual/potential failure to hold. 

In the case of Skyworks, the stock still looks very heavy and should, in time, have enough weight to push through the $19.25 support level. For a potential target in case support breaks, I again turn to the Fibonacci numbers. A 23.6% Fibonacci extension of the September to December swing lower gives us aprice target near $16.30.

Since how this trade works out is largely dependent on Apple, the analysis would not be complete without looking at a chart of Apple.

Much like Skyworks, Apple retraced some of its September to November sell-off, but unlike Skyworks, Apple retraced to the more meaningful resistance level of 50%. This gives me more confidence that the stock's early December highswill hold as resistance and the key support level near $500 will eventually break. And by the way, should Apple break below the $500 support level, its downside target would be near $460, which is about 55 points lower than current levels.

Action to Take --> Short Skyworks at $20.50 or higher. Set stop-loss at $22. Set initial price target at $18 for a potential 12% gain in 4-5 weeks.

This article originally appeared on TradingAuthority.com:
Apple's Pending Breakdown Could Lead to Fast Profits in This Small Cap




The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

© Copyright 2001-2010 StreetAuthority, LLC. All Rights Reserved.


This article appears in: Investing , Investing Ideas , Stocks

Referenced Stocks: AAPL , SWKS

StreetAuthority

StreetAuthority

More from StreetAuthority:

Related Videos

Don't Pay Up to Play REITs
Don't Pay Up to Play REITs          

Stocks

Referenced

Most Active by Volume

100,376,898
  • $17.62 ▲ 0.51%
83,231,837
  • $25.62 ▲ 1.91%
75,739,329
  • $111.78 ▼ 0.77%
65,297,937
  • $36.37 ▼ 1.76%
59,053,093
  • $47.66 ▲ 0.29%
53,482,350
  • $2.59 ▼ 0.38%
51,504,284
  • $7.34 ▲ 2.37%
51,434,656
  • $8.14 ▲ 6.96%
As of 12/19/2014, 04:15 PM


Find a Credit Card

Select a credit card product by:
Select an offer:
Search
Data Provided by BankRate.com