AAPL stock: Finally a Catalyst
Apple Inc. (NASDAQ:AAPL) stock finally reported third-quarter earnings on July 26, 2016 and investors cheered. AAPL stock gapped up post-earnings and is currently trading at $107.48. The anxiety surrounding its earnings has finally subsided.
I have been patiently waiting for the technical pattern to complete and earnings were exactly the catalyst that I needed to help discern a direction for Apple stock. Now that we have a direction, I will look for price objectives so I can set up an appropriate trading strategy.
The chart below illustrates the pattern in question:
Chart courtesy of www.StockCharts.com
Since July 2015, APPL stock was confined to a trading range that produced a large descending triangle. In general, these triangles are seen in a bearish light based on the trading action. Each and every time AAPL stock approached the support line at $90.00, buyers appeared to support the price. Each subsequent rally ends at a lower high, as sellers are more willing to exit positions at a lower price. On average, these patterns break down, but that is not always the case.
Descending triangle patterns often have five points of contact before the pattern breaks in either an upward or downward direction. AAPL stock completed these five points of contact and broke out to the upside after its earnings announcement. This confirmed a bullish bias. The initial target based on this pattern is the old high near $130.00, where the descending triangle pattern began.
The longer-term chart below suggests higher prices ahead:
Chart courtesy of www.StockCharts.com
Examining the long-term chart, we observe that AAPL stock has been trading within the confines of a large channel that spans approximately 10 years. The chart is made up of higher highs and higher lows, forming a staircase-like pattern. This is best described as an uptrend.
If we assume the trend will continue, then we must expect AAPL stock to run higher and hit the upper trend line. It is hard to discern that price from the chart above, but we can safely assume the current resistance assumed by the upper trend line is above $130.00.
One Strategy to Consider for AAPL Stock
The strategy I’d suggest for a stock like this would use $130.00 as a price target, as both chart patterns support this price objective. The strategy will use options to capture the trade to minimize the initial outlay and define the risk.
A bull call spread would effectively capture our objective and simultaneously minimize the initial outlay. This strategy involves simultaneously buying calls at one price and selling an equal amount of calls at a higher price, such as buying one March 17, 2017 $115.00 call contract for $4.40 and selling one March 17, 2017 $130.00 call for $1.15. In this instance, the net outlay is $3.25 per share. At expiration, if Apple shares are trading above $130.00, the net value of the trade will be $15.00 for a profit of 360% (excluding fees).
The risk of this trade is $3.25 per share. If the trade runs against you, that is the maximum possible loss.
The Bottom Line on AAPL Stock
AAPL stock has finally broken out of a consolidation pattern and the breakout is to the upside. The charts are pointing to price objectives north of $130.00, which can be used to place an effective trading strategy. The path of least resistance for AAPL stock is higher.
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