The Curious Investor

We discussed Fibonacci Retracements last week and I promised a more in depth post on my thoughts on Apple’s current rally during my Quarter 1 Investment Review. Today, we’ll put the two together with a look at the recent rally in Apple’s stock. The stock sold off heavily as people took profits and ran away from the stock during the January and February turmoil in the broader markets, but it’s quickly begun a retracement as the markets settled down in the last month.

As Apple is held in my technical portfolio, let’s look at the technicals and try to zero-in on the ramifications of the recent rally in the stock. Apple’s swift recovery from free fall isn’t entirely normal of a correction of this size. The stock traded at its bottom level for no more than two months (from the latter part of January to mid-March and began a fresh new uptrend. I was anticipating a longer basing period which would coincide with the regular cycle of a growth stock - exuberance over growth potential, basing while performance catches up with valuation, renewed exuberance over continued performance. This new rally would seem to signal that previous expectations on Apple remain in place and that fear based selling in January is being met with equally optimistic buying now. Not necessarily a good sign for a strong foundation to a rally.

The good news is that the current uptrend seems to be a strong one with MACD steadily climbing and without excess divergence of the MACD indicators and congruent action in its RSI. The stock had no trouble cruising past its final gap down and has begun filling to $160/per share. Coincidentally (or not), this resistance level is also marked by the 23.6% Fibonacci retracement level and the end of this gap filling will mark a 50% retracement, another significant Fibonacci point.

Thus far, the run has been orderly with consistent volume right around its 50-day moving average. It’s hard to get a gauge on the true buying and selling dynamic as the stock was marked with unusually heavy action from December through February which has skewed up the 50-day moving average. If you look at a full year time frame, you’ll find that volume would seemingly remain high-ish over the last month as compared to historical levels.

Whether or not you believe in Fibonacci retracements, it would seem that Apple is following the outlined support and resistance points rather nicely. Today, marked the first real testing that the stock has done since getting back on the bull, flirting with $160 and pulling back rather decisively by the close. Testing here between the 50% retracement level and the 38.6% ($150) retracement level is probably likely especially with earnings expected in two-weeks. I would expect that another quarter of strong earnings will be necessary to keep this rally moving forward and an optimistic guidance could be grounds for a break out above the 50% retracement level towards the 79% level. For those waiting for the stock to regain its $200 highs, it is this level which will be most important to follow as many retracements break down in this range, often triggering a potential longterm double top.

It is my opinion that Apple’s stock will eventually have to “pay back” its highly forward looking valuation (P/E > 30, FPE ~ 25) with a period of languishing performance (though not necessarily a pullback) longer than what we’ve seen in the past few months. Whether this happens sooner or later likely depends on its next earnings report as it seems optimistic buying has regained control of the stock’s performance right now. A valuation here at the $150-$155 level is likely appropriate, but a strong enough earnings report could possibly persuade these short-term traders to push the stock back towards its old highs.

On the earnings front, it would seem that the general news out there is positive. Research In Motion reported very strong Blackberry sales over the last quarter and one would hope that this is due to overall growth in the smart phone market. As Apple is playing the role of market entrant, it is not likely that the iPhone suffered as a result of Blackberry’s success, but instead likely joined in the benefit of the rising tide. Granted, Blackberrys are much more successful internationally than iPhones and the US market was not particularly impressive in the last quarter, so this is not a foregone conclusion. Furthermore, Eric Savitz of Barron’s recently opined his belief that a fall in flash memory prices could have Apple’s margins looking pretty sweet for the upcoming quarter.

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