Why Bruised Apple Stock May Grow More Rotten

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The writing may not be on the wall, but it may be on the iPad for Apple (NASDAQ:AAPL) investors. Let’s look at what’s happening in today’s market, off and on the price chart, then offer a risk-adjusted determination on positioning in AAPL stock.

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Apple. It’s a name rarely associated with relative weakness and underperforming the Nasdaq 100. The stock does constitute a full 13% of the tech-heavy index. And it didn’t become the world’s largest company and first enterprise to be worth more than $2 trillion without bearing regular fruit for investors, right?

But since clawing its way out of September’s broad-based correction, shares of AAPL have been less sweet by Wall Street.

At its best, the Nasdaq retraced more than 76% of last month’s aggressive selloff. And right now the index is wedged between its 50% and 62% retracement levels. Comparatively, Apple’s rally was sent packing against its 62% Fibonacci resistance level. Now it’s stationed about 3% beneath the midfield line. Shares are also a full 6% beneath late August’s ballyhooed pre-split price. Net, net it’s not rocket science to realize the company’s shareholders have been on the defensive.

So, what gives? There’s likely a couple key drags working against Apple. A heavily drum rolled unveiling of Apple’s latest mobile device, a 5G iPhone 12, hasn’t moved the needle for a company. What’s more, in front of its next quarterly report AAPL stock is historically and in absolute terms, as pricey as its products. All eyes and cameras will be watching Apple a week from today to learn if its 30x forward price multiple is at increased risk of contraction.

There is also the Presidential election and its potential impact on Apple’s business.

Biden has continued to lead in national polls by nearly 10 points. That’s good for Apple. As CNBC’s James Cramer has noted, a new administration reopening a relationship with China should help Apple, as well as consumer brands like Starbucks (NASDAQ:SBUX) and Nike (NYSE:NKE). But as 2016’s failed polling demonstrated, and given this election’s shadowy overtures, Nov. 3 may not bring in that sort of confirmation. It could take a long while.

There’s also a Catch-22 of sorts with a Biden win and more so if Congress goes fully blue in both the Senate and House. It’s no secret, antitrust proceedings against Silicon Valley’s largest tech shops would continue to gain traction. But there’s already cause for concern right now in AAPL.

Inquiry crosshairs by the Department of Justice aimed at Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) have recalibrated on an exclusive search deal with Apple. And diverging price action the past couple sessions with AAPL hitting relative lows and GOOGL stock climbing to relative highs appears to confirm Wall Street is more concerned over Apple’s prospects than worried about Alphabet.

AAPL Stock Weekly Price Chart

Source: Charts by TradingView

This week’s episodic selling pressure has peeled off just enough of the share price to put AAPL stock’s valuation back below $2 trillion. The real concern though is a bearish-looking monthly chart that’s engulfing the doji “decision” candle, which now has growing bearish confirmation from the weekly time frame.

As the AAPL price chart shows, shares of Apple have weakened to trade beneath the prior period’s shooting-star topping candle. Optimistically, AAPL remains in an uptrend. But after failing at the 62% retracement level, a lower-high pattern now also in play and the stock’s tenuously positioned weekly stochastics, the combination raises the odds the writing could be on the iPad for bullish investors.

Considering that September’s low is already testing Apple’s 38% level tied to the March novel coronavirus bottom, and given the combined warning signs discussed above, I’d conservatively estimate a decline towards $85 – $95. That’s simply a challenge of zone 50% – 62% Fibonacci support. Still, I wouldn’t call that type of movement in Apple shares easy to sit idly by in anticipation of a bullish outcome from one of the market’s most revered investments.

After decades of outperformance in getting where it is today, investors shouldn’t ignore industry disclaimers of past performance not being a guarantee of future returns. Ultimately, at a minimum, hedging the growing possibility of increased downside risk in Apple shares with a protective put or a favored collar strategy for this “core” holding in many portfolios makes a great deal of sense.

No stocks owned: On the date of publication, Chris Tyler does not hold, directly or indirectly, positions in any securities mentioned in this article.

Chris Tyler is a former floor-based, derivatives market maker on the American and Pacific exchanges. The information offered is based on his professional experience but strictly intended for educational purposes only. Any use of this information is 100%  the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.

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

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