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%
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
Since how this trade works out is largely dependent on Apple,
the analysis would not be complete without looking at a chart of
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
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
This article originally appeared on TradingAuthority.com:
Apple's Pending Breakdown Could Lead to Fast
Profits in This Small Cap
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