Feb 102013

AAPL has begun a rally that should last a few weeks. Let’s look at the evidence. The 2nd and 3rd day after earnings created a 2 day reversal formation. The following week we had another 2 day reversal pattern that formed a successful retest of the first bottom. Price has since broken out above 465 resistance on good volume. AAPL has also closed above the 5 day EMA for 4 days in a row. The last time it did that was during the November rally. This rally can therefore be considered the sister rally to the November rally. Let’s look at how far we may expect this current rally to run. There are several ways to come up with an expectation. The Nov rally was 89 points, so that would mean a target of 524 this time. A Fibonacci 0.50 to 0.618 retracement of the 594 to 435 decline would mean a target of 515 to 533. A Fibonacci .382 of the entire 705 to 435 decline would mean a 538 target. And lastly, there is the chart shown below. I drew the lower trend line connecting the two most significant lows of the past year, and then a parallel line from the Spring 2012 peak at 644. During the week ending March 1 the upper line is at 533. I’ve talked a lot about the AAPL symmetrical time cycle pattern and the expected next significant peak during the week ending March 1. This is a chart representing that analysis. Notice the tops and bottoms that have occurred equidistant from a symmetry line the week AAPL topped at 705.


So we have price targets in a range from 515 to 538. From the oft mentioned time cycle analysis I have mentioned over the last few posts, that target is expected during the week ending March 1, as represented in the above chart.

Following the next peak, whenever and wherever it actually occurs, I will be expecting a 3rd push lower, contained within the downward sloping red trend channel. The 1st push down was from the all time highs at 705 to the Nov low at 505. The 2nd push down took us to 435 after earnings. The 3rd push down will occur during the Spring, March into April. It will either be a retest of the 435 lows forming a higher low, or make a lower low with bullish divergence. That will complete the full year of AAPL weakness that began in April 2012. We will have had a full year of AAPL correcting the gains from the huge rally at the beginning of 2012. The year long correction was rooted in fundamentals: the large drop in earnings growth, as can be seen in the AAPL Earnings Growth Chart. Another way to look at the fundamental underpinnings of the year long correction can be easily seen in my new chart showing AAPL Continuous Free Cash Flow. That last chart is especially interesting as it shows the one quarter pause in slope of the Free Cash Flow (FCF) lines in 2011, and the resulting price action. And we now have four full quarters of pause in the slope of the FCF lines. The chart includes my projections for the next 3 quarters. The July and October earnings releases have a far easier comparison to 2012, which is why the FCF lines will likely resume a steeper upward slope. My FY2013 earnings estimate is only 12% higher than FY2012. And yet with even that slower earnings growth, the FCF lines still resume a rather steep slope. I will be undertaking some further analysis to fine tune my projections. And the April earnings release will add a lot of additional information as well. Even if I am somewhat optimistic with my estimates for Jul and Oct, the slope will still resume upward, exactly because of the easy comparisons to Jul and Oct 2012 mentioned earlier.

This phenomenon of quarter comparisons of 2013 to 2012 is why the 3 push down price pattern will mark the end of the year long correction in AAPL from April 2012 to April 2013. Following the low expected in the Spring of 2013, I will be expecting AAPL to end the current under-valuation and embark on a long and steady rally to more reasonable valuations both in terms of CPE and CP-FCF. Look at the AAPL CP-FCF Chart again and imagine AAPL heading towards a FCF multiple of 12 or 13 in the latter part of 2013. Even if my lines need to be drawn slightly lower, that will still represent an impressive upward revaluation rally.

I am hopeful that soon AAPL will begin to move more in line with the general market. It is always easier to analyze the AAPL technicals when it is topping and bottoming at about the same time as the general market. If the Dow and S&P can continue its grind higher into the week ending March 1, the expected AAPL price movements will be easier to confirm as they happen.

This entire roadmap expectation for 2013 is what I will be monitoring, fine-tuning, and likely modifying in future posts as I watch this unfold.

Update: Mon Feb 18

The early peak this week at 485 has tempered the upside targets and proven they are too optimistic. I posted this in the Forum after Tuesday’s trading along with the explanation and the chart shown below, which now includes the rest of the week’s trading. The blue up sloping channel is what I think will prove to be a bear flag. The end of week decline has also now overlapped the price range of the day after earnings and fallen back below the 433-465 breakout zone, evidence that this rally off the lows is, as expected, NOT part of a new AAPL bull market.

I continue to believe an important high will come during the week ending Mar 1 (denoted by the vertical blue lines). I expect that high will be within the bear flag channel. Since price has come all the way down to the proposed lower blue trend line (now only a few points below Friday’s close), we should expect that AAPL may not even make it back up to the upper trend line for its peak. This last rally attempt is the most uncertain, as this AAPL upward swing cycle is nearing its end. The pink moving average in the chart is the 45 day EMA, which as you can see has exactly marked the peaks of each significant swing high of the past 4 months. I will be watching that moving average as well as we approach this high we’re looking for.

The rest of the analysis in the original post above still stands. After this upcoming peak, I expect AAPL will begin a multi-week decline and put in a low just below the 435 low. If this whole multi-week rally can’t even make it above some key moving averages (like the 45 day EMA), then we can be reasonably certain new lows are ahead. How far below 435 is hard to predict. That’s because capitulation can take on many forms, and how the general market is behaving (which is due for a correction at some point soon, too) will play a part in how AAPL’s price behaves. There’s also still that previously posted analysis that says that the range for the quarter should be near 110 points, or even more.


Update: Wed Feb 20

The bear flag scenario has been invalidated. With no short term expectation, I am watching two larger timeframe expectations that have already been covered in previous posts: (1) The range for the quarter should be 2.1 CPE high at a minimum, and 2.5 CPE expected. That would translate to 93 points, and 110 points respectively. (2) The earnings gap down was a revaluation, not capitulation. Capitulation is yet to come.