Sunday, November 20, 2011 -- On October 1, 2011, we published a 12,000-word (24 Single-Spaced MS-Word pages) article entitled The Apple Game-Plan for October which basically laid out what we expected to see out of Apple and how to position before and after the iPhone 4S event. If you go back and look at that October game-plan, you will see that everything played out precisely as planned. We got everything we wanted and Apple traded exactly as we expected it to.
We have high expectations that this Apple Game-Plan for December & January will provide a lot of guidance and a good plan for the next few months. The point of this article is to offer up a general thesis for how to position in the various Bullish Cross portfolios and to provide information that we think is important for determining the short and intermediate-termdirection of the stock going forward. Each part will give a brief summary of information that we plan to expand on during the week. This article is meant to give you a general and broad overview.
1. Apple's Stock Performance Post-Earnings
Over the weekend, I spent a tremendous amount of time doing some major research on Apple's performance after earnings. We're going to pause the valuation research for a brief moment to spend some time on this issue as we believe it is going to be very important for being able to judge where Apple is headed for the months of December and January. Obviously, where Apple goes for December and January will be important from the perspective of the January leg of the 10-bagger thesis. That is actually the whole point of this article. To explain how to handle the January leg. The April and July legs don't need to any attention right now. Those should just sit in your back pocket. Neither are at any risk. So let's begin.
Weeks 1-4: Reviewing the Post-Eranings Performance Analysis
For those of you who were around right after Apple reported its fiscal Q3 2011 earnings back in July, you will remember that we did an exhaustive amount of work on analyzing the historical data on how Apple has performed in the weeks following the opening price the day after earnings are released. Everyone following Bullish Cross should know that Apple reports its fiscal earnings after the close of trading usually during sometime in the third week of January (FQ1), April (FQ2), July (FQ3) and October (FQ4).
Thus, the earnings impact to the stock price is typically felt the day after Apple reports its earnings since it reports in after-hours. We refer to this day -- the day after Apple reports its results -- as the "post-earnings," "post-earnings day" "the day after earnings."
Now what we have shown is that Apple tends to set its high of the day on the session after it reports earnings right at the opening bell. We have demonstrated that excluding this quarter, Apple set its high of the day "post-earnings" right at the open of trading in 7 out of the last 9 quarters. In fact, we showed that in every quarter where Apple gapped-up higher the day after its earnings results since the financial crisis, the high of the day was set right at the open. We even showed that in the vast majority of the cases, this opening price was not only the high of the day, but it was the high for at least 4-weeks. Meaning, if you sold right at the gap-up, you were almost always going to catch the very top and you would be able to buy back 4-weeks later at a lower price.
We also demonstrated that for whatever reason, Apple's stock tended to be down between 4% and 5% exactly 4-weeks from the opening price the day after earnings. If you took what the opening price is the day after Apple reports earnings and go out exactly 4-trading weeks from that day and look at the close, Apple tends to be down between exactly 4-5%. Now are you ready to be shocked? This 4% sell-off has happened in 8 out of the last 9 quarters! This despite the fact that Apple gapped-up significantly in 7 out of the last 9 quarters. So even though the earnings are great and the stock gaps-up higher, the stock is usually down 4% four-weeks later.
Now since the lows of the financial crisis, Apple has gapped-down after earnings only twice in 10-quarters. What I have found is that it's better to use the high of the day instead of the open on those quarters where Apple gaps-down. So for example, in fiscal Q4 2011 -- this past quarter -- Apple opened at $401.35. Yet, it set the high of the day at $408.42. That high of the day is a much better data point in which to do this analysis than is the open. And that's because what we're trying to show is how the stock performs from the high of the day post-earnings to each individual week in the quarter. For those quarters where Apple gaps-up, the high of the day is at the open.
Now as you can see from this table below, there is a clear-cut trend in terms of how Apple generally performs in the first-four weeks after earnings. Believe it or, it is pretty damn consistent. Here is exactly what tends to happen and it makes perfect sense in every way.
In Week 1, what Apple tends to do is trade down anywhere from 1% to 2% from whatever its opening price is the day after earnings. Again, here is how we define week 1. If Apple reports earnings on a Tuesday, then the day after Apple reports earnings is on a Wednesday. The opening price post-earnings is the open on that Wednesday. When we say week 1, what we are saying is how the stock performs from the opening print on the Wednesday after earnings to the closing price the very next Wednesday.
So let's consider the logic behind why Apple tends to close down 1-2% exactly 1-week after the opening price post-earnings. Usually that is the result of people selling their positions. Everyone who played earnings or got into the stock because of earnings is getting out of the stock. If you look at the table above, even though Apple has gapped-up higher in 8 out of the last 10 quarters, the stock was lower from that gap-up opening price or high of the day 1-week later in 8 out of the last 10 quarters and in 6 out of the last 6. So that means if you sold the open or the high of the day in 6 out of the last 6 quarters, you would have been able to buy Apple back cheaper 1-week later.
And as you can see from the chart above, the selling is even worse by week 2. In fact, the last time that Apple was higher than the opening price post-earnings 2-weeks later was in April 2009 -- the quarter that the financial crisis ended. In nine out the last nine quarters, Apple closes down at least 1-2% exactly 2-weeks from the opening price (or high) the day after earnings.
Then something interesting happens in Week 3. In Week 3, we tend to see a big rebound. And that does make some logical sense given that the stock has seen some selling pressure immediately after earnings and so the stock is merely testing those highs a few weeks later. In Week 3, the stock is actually just a tad-bit higher than its opening price post-earnings. In fact, what's interesting is that if the stock is higher, then it's really higher. If the stock is lower than the opening price post-earnings in week 3, then it's really lower. For example, the stock has been lower in week 3 in five occasions since the financial crisis -- three of those five cases came in the most recent three quarters. In those quarters where Apple was lower in week 3, the stock was down between about 3.5% on average.
Then comes week 4. For whatever reason, Apple takes a pretty big hit between week 3 and week 4 such that the stock ends up closing down at least 4% from the opening price-post earnings. Notice, that even though the stock is up half the time from that opening price post-earnigns in week 3, those gains are not only reversed, but the stocks ends up falling an additional 4%. So we're talking a pretty big hit to the stock between week 3 and week 4.
As a matter of fact, as you can see from the chart above the stock is generally down at least 4.0% in 7 out of the last 8 quarters. Now last quarter, we spend a lot of time detailing each trading week and we dedicated an article to each week. For those who are following this analysis this quarter, you should know that Apple ended Week 4 last Wednesday and is now actually in Week 5. We stopped the analysis in Week 4 last quarter.
We are now picking up where we left off and continuing this research until the end of the quarter. Obviously, it is important to finish the research and continue the analysis until Week 13 where the quarter ends. Because doing so will bring different trends to light. Upon doing the research over this past week, I found a lot of very interesting and powerful trends. Trends that are just like the "Week-4 down by 4%" rule. By the way, as you can see from the chart above, Apple ended week 4 down by 5.79% from its HOD post-earnings which is the worst 4-week performance since the lows of the financial crisis.
Weeks 4 - 13: Continuing the Analysis
Apple bottomed at $80.00 during the lows of the financial crisis. As of the close of trading on Friday, Apple is up about $300.00 from that low. Obviously. those points had to come from somewhere. If Apple is always down 4% from its opening price post-earnings, then it means the stock is down 4% in the first four weeks of every quarter. The stock can't rally 300-points during that time period unless there is an area where the stock finally starts to perform. That's the point of this research. To find out when it is that the stock tends to rally.
First, I should begin by saying that Week 5 tends to be the bottom of the quarter and not Week 4. As bad as Week 4 is, it is nothing compared to Week 5. Week 4 is just the beginning of the sell-off from Week 3. As we showed above Apple is up half the time from its opening price in Week 3. Then it sees a sell-off between Week 3 and Week 4 such that it is now down 4% in Week 4. That has been the case in 7 out of the last 8 quarters.
Yet, by Week 5 things get a little worse (or better in some cases). Right now, Apple is technically in the middle of Week 5. Yet, all indication suggests that Apple will finish Week 5 down pretty significantly. Right now, Apple is actually down 8.20% from its high post-earnings. Even if it rallied a bit, it would probably still end Week 5 down 6% or so. Thus, you could pretty much include Apple in this Week 5 analysis. Let's assume for argument sake that Apple closes down 6% this week. If that was the case, then in 7 out the last 7 quarters, Apple has closed lower exactly 5-weeks after the opening price post-earnings.
Now that is incredible when you consider the fact that Apple has moved as high as $170.00 from seven quarters ago. That means Apple had not only recover the losses dealt to it during weeks 1-5, but it had to move significantly higher in weeks 5-13 in order to post those gains.
Please note that Fiscal Q4 2011 is obviously an estimate. Apple completes Week 5 at the close of trading on Wednesday. Right now it is down 8.2%, but we're assuming that it will be down by at least 6%. As you can see from this table above, in five out of the last seven quarters, Apple is down by at least 5% in week 5. But notice that in fiscal Q4 2010 and fiscal Q1 2011, Apple did see a recovery in week 5. So week 5 is not always bad, but on par it is a bad week.
In fact, I think Week 5 as a whole tends to be the week where Apple is most likely to bottom. Because notice how in Week 6, Apple across the board much better than in Week 5. In fact, since Q1 2010, there is not a solitary quarter where Apple is lower in Week 6 than it was in Week 5. If you look at some of these recoveries, they are rather substantial. What that tells you is that Apple tends to see a recovery starting in Week 6. Yet, even though that's the case, the stock is lower in four out of the last five most recent quarters from its opening price post-earnings in Week 6. It's just that it isn't as bad as it is in Week 4 or Week 5.
Then in Week 7, it seems to become a little muddy. While we know that there's a clear recovery that takes place in Week 6 in every single quarter since 2010, in Week 7 things either get even better or worse. We either see a continuation of the recovery or a sell-off. It seems pretty much split down the line.
Now Week 8 is on the whole a lot better. In fact, even in those quarter where Apple does continue lower, you will find in the next section that the low happens in week 8. Moreover, if you look at this table below, you will notice that the intra-period high tends to happen either in Week 1 or Week 8. Meaning, Apple either hits its final high either during the first week of trading after earnings or during week 8. Also you should notice that the intra-period low happens in either weeks 4, weeks 5 or week 8. Please ignore the table #'s.
It's now time to get into the more important analysis. And that is what happens after week 8. So right now we are concluding week #5 for Apple which will be done on Wednesday. There's a historical tendency to see Apple put a post-earnings low in during Week 5 and again during Week 8. Wednesday, December 14, 2011 happens to be Week 8. From that point on, you'll see that Apple tends to undergo a very significant rally. Which believe it or not is completely consistent with the December seasonality. Maybe this is why November has been so shitty and December has been so great for Apple. Notice that according to the analysis I've laid out, the following months are generally bad for Apple:
Months that are Bad for Apple
1. Late January, February, Beginning March
2. Late April, May, Beginning June
3. Late July, August, Beginning September
4. Late October, November, Beginning December.
Months that are Good for Apple
1. 2nd Half December - 1st Half January
2. 2nd Half March - 1st Half April
3. 2nd Half June - 1st Half July
4. 2nd Half September - 1st Half October
Now look at what I wrote above and think about how Apple performed in the "bad" periods this year and how Apple performed in the "good" periods. You will be shocked to learn that this historical analysis is pretty much dead on. It's not just this year. It's been like this since the bottom of the financial crisis. Almost 3-years.
So based on the historical analysis here's what should happen. Notice we will analyze this story within the context of the technical picture and market outlook. We just going to see what the historical post-earnings performance analysis says standing alone.
Based on the analysis above, Apple should bottom sometime between last Wednesday and this Wednesday. Then whatever the closing price is on Wednesday, we should see a much higher close -- maybe $10-$15 higher -- next Wednesday which would be week 6. Then between next Wednesday and the following Wednesday -- Week 7 -- Apple will either continue the recovery or it will go down the drain. Though if it does go down the drain, it probably won't make a new low until the next Wednesday which is December 14 and Week 8. If Apple does make a new low, it will happen in Week 8.
So that could be something like a double-bottom in this current market. Suppose Apple capitulates by Wednesday this week. Then it bounces next week. Then the week after it sells-off to go down and test the lows. But that sell-off won't get down to the lows until week 8 which is December 14. So that is what the week 1- week 8 analysis tells us. Now let's take a look at what tends to happen between Week 8 and Week 13. Remember there's about 13 weeks in every quarter.
Now what I've done in this next section is instead of looking at how Apple has performed since its opening price post-earnings, I took a look at how the stock has performed relative to its closing price in Week 5. So the idea here is this. Obviously Apple's post-earnings performance sucks until Week 5. In fact, in every single quarter since fiscal Q1 2010, the stock has been down rather significantly both points and percentage wise.
As you can see from the table below, the stock has been down double-digits in five out of the last seven quarters and in the solitary quarter that Apple was green at Week 5, it was only up by $2.90. This suggests that an investor would be wise to sell his Apple right at the open and consider buying back exactly at Week 5. If not sell his Apple, then what he/she should do is sell calls against his/her position every week until week 5. It also suggests that for the 10-bagger thesis, there is really no reason to remain long any of our calls. Instead, what we should be doing is thinking about a solitary measured upside hedge and move to the sidelines. We will explore doing this in January.
But as you can see from the chart below, starting in Week 6, Apple's performance has been absolutely stunning. The stock is up almost across the board from its lows in Week 5. And by Week 10, it is deeply in the green in double-digits in most instances, across the board. Now again. This is judging the point moves from the low set in Week 5 which happens to be this Wednesday.
Now for those who aren't lost and are fully with me, you are about to learn something very significant. This is very exciting I must say. I love this shit. Now notice the last column. The column is entitled TPAFPEOHUNED. I didn't know what to call it, but here's what the column stands for and it's important in analyzing week 13.
Total Points Advanced From Post-Earnings Opening High Until Next Earnings Day (TPAFPEOHUNED). What this column shows is how many points Apple moved from the opening/high the day after earnings until the close of trading the day of the next earnings report. So basically, it show how many points Apple moves from the open the day after earnings until the next quarterly report.
Here's why this column is very important in the analysis. It's important because it basically shows you that no matter badly Apple takes a beating -- and it has lots of times since the bottom of the crisis -- the stock pretty much fully recovers to the post-earnings opening high by the time it reports. Moreover, the only two times Apple remained lower than that post-earnigns opening high was in Q1 2011 and Q2 2010 and both times were relatively small point-losses.
But notice this. In the typical quarter, Apple tends to post double-digit point-gains by the time it reports earnings. Now here's why it's important to compare this to week 13 in the column. Notice that Week 13 is much grater in terms of the point gains. Two quarters of +40 in gains, one quarter in +$75 and two quarters of +$30. Only one quarter was red by a minor -$0.47 and one quarter where it was +$7.
The reason the gains are much large is because it is judging the point gains from week 5 instead of from the post-earnings open in the previous quarter. Thus, anyone who sold their Apple right at the open and methodically just bought their Apple back exactly 5-weeks later and then held through the next earnings report and did this every time, they would be up just about $100.00 on Apple since the financial crisis.
Finally, here's what is sort of important about this analysis. Under very close examination, what you will notice is that in quarters where Apple takes a double-digit point beating by the close of trading in Week 5, it has a tendency to put on big gains in Weeks 6-13. In fact, the table below only shows those quarters where Apple saw a double-digit point decline so you can get a more clear picture of why Week 5 (this week) tends to be a bottom for the stock:
Notice how in every quarter since 2010 whenever the stock closes lower by double-digit point-loses at Week 5, that by Week 8 or Week 9 in most cases there are double-digit gains. Also notice that by Week 10, Apple is moving way higher than whatever the closing price was this week. Also notice that in the last three times we saw double-digit loses by week 5 -- Q3 2011, Q2 2011 and Q4 2010 (same time last year) -- Apple put up massive point gains by week 13.
In fact, in fiscal Q3 2011 (last quarter) the stock was down $19.94 at the week 5 close. It ended up rallying +$46.06 from that week 5 close to be at $422.24 at Week 13. In fiscal Q2 2011, a very bearish period for Apple, the stock closed down exactly $20.00 at $335.00 a share at Week 5 and then rallied a whopping $41.85 points from that level by Week 13. Finally, in fiscal Q3 2010, the stock closed down $22.20 at Week 5 and rallied a gargantuan $75.11 in just 7-weeks. That's almost $10.00 each week every week for almost 2-months straight. That was the previous 3-times we saw Apple down double-digits at the Week 5 mark.
Again, Apple has rallied almost double-digits in Week 6 as a sort of recovery. Then Week 7 and Week 8 -- while generally positive relative to Week 5 -- Apple doesn't really start to pick up the pace until Week 9. By Week 9, Apple has now rallied double-digits off the Week 5 lows in 71.4% of the time (5/7). By Week 10, Apple has always closed across the board green from the Week 5 close. Then in Week's 10, 11 and 13, the stock tends to just simply steamroll ahead.
Now lets's make one last final comparison. I think this one should really shed light on how extremely positive week's 5 - 13 really are. Take a look at the Week 5 close column. That is how many points Apple is down from the post-earnings opening price. Now look at the last column. That column looks at how much Apple has moved forward from that post-earnings opening highs.
So that means that in this 7-week period, Apple goes from double-digit losses in most quarters to double-digit gains. It has to revere by at least $30 - $40 in most cases. And in fact it has. If you look at the last seven quarters, Apple has rallied by at least $30+ in 71.42% of time (5/7) since Q1 2010. That means based on the historical average and trend, Apple should see a 30-50 point rally from the close on Wednesday by the time it reports earnings. Finally, to repeat in five out of the last seven quarters, Apple saw a double-digit point advance from the opening price post-earnings to its close price the day of the next earning's report. Apple puts up about $25.00 on average from the high on earnings day until the close the next earnings day. If the trend were to continue, Apple would close at $432.00 ahead of its report in fiscal Q1.
2. The Apple Technical Picture
So according to the historical analysis we laid out above, Apple could bottom by as early as this Wednesday and then see at least a big rebound between this Wednesday and next Wednesday. And then we should see either a continuation of that rally or some broken trading that takes Apple back down to test the lows briefly by mid-December. Then after we reach mid-December, Apple should go on a huge 5-6 week rally that will take the stock up to between $400 and $432 a share. Let's see what the technicals say about that.
The first thing to look at is the 60-minute chart for Apple. Apple is trading in a falling wedge formation which is actually overall very bullish. Normally, what bears want to see is the trend we sort of saw back in late September and early October -- much good it did them though. What you want to see is an equal distance between the upper and lower trend-lines with a nice consistent move lower. When the upper and lower trend-lines converge or divergence, then it usually signals a trend-reversal. EIther that, or you need to see a vertical move that breaks the trend. That means Apple would need to fall completely through the floor.
Yet, if Apple does "fall through the floor" with a vertical move down through the lower trend-line, in most cases that means capitulation. That's sort of the problem with crashes. In fact, that's precisely what happened in early October. If you look at the chart below, you will see that Apple fell through the lower trend-line, tested support at $355, capitulated and then bounced very hard up to the upper trend-line. Steve Jobs news came-out, Apple tested the lows with taking a move in that direction, that re-test ultimately and utterly failed, Apple broke above the upper trend-line and then rallied something like $70.00 in a few days.
Well right here, we have a similar formation. Though this formation is more bullish than the one we had in September - October. Notice that even though the sentiment is more bearish today, the formation is more bullish. Now it's possible that we may see the same thing. That would require a breakdown below the lower trend-line on the falling wedge followed by a recovery, test of the upper trend-line re-test of the lows and final breakout to $432.00. This chart below basically outlines that scenario with option #1. We see these types of moves very often. They're very easy to spot. A breakdown of the trend lower tends to mean capitulation.
Now let's take a look at the Apple daily chart and gather whether there is any insight to be taken there. The chart below outlines each time Apple has capitulated and bottomed after a significant sell-off. Right now, Apple is not more than a handful of session away -- I suspect capitulation will be on Monday -- from putting in a firm bottom. Here's why. The stock has been trading at the lower b-band now for several sessions. The stock is down exactly $50.00 (11.77%) from its highs, it's nearing oversold conditions on the daily chart (very rare) and it's one deep gap-down away from being far below it's lower b-band.
What we're going to want to see on capitulation day is for Apple to gap-down something like $4 - $5 below its lower b-band. As of Friday, November 18, 2011, the lower b-band sits at $374.63. If Apple were to gap-down to $369.00 on Monday morning and then proceed to sell-off down to the $364.00 area (200-day moving average), that would very likely result in capitulation. Here's why. All of the elements of capitulation would be fulfilled. The only thing Apple would need after such a move down is a rebound all the way up to the break-even point. Below is the capitulation list:
Capitulation Day Party/Invite List
1. DId we gap-down far below the lower b-band by at least $3- $5? Check!
2. Is Apple getting close to oversold on the Daily? Check!
3. Is Apple deeply oversold on the 60-minute with positive divergence? Check!
4. Is Apple nearing a major line of technical support like the 200-day moving average ($363.40)? Check
5. After reaching technical support, did Apple find significant buying interest as such that the stock performed a Bullish Hammer closing either flat to green on the day? (Check!0
We have capitulation. If we get these 5 things to happen, then the stock will firmly bottom. You can expect to see a huge rebound from there. Now let's compare this to the 60-minute chart and the post-earnings performance analysis above.
If Apple gaps-down below $370.00 which would bring it below the lower trend-line on the falling wedge leading a "falling through the floor" situation. If that happens, the stock would get really oversold on the 60-minute RSI and it would result in a vertical breakdown of the trend.
I think in this scenario, the 60-minute chart would be screaming for a rebound. Everything would be perfectly aligned. The only thing left is to find buyers. If buyers come in because they are convinced in the story and the bottom, then we will have capitulation and the stock will likely see a huge rebound over the coming weeks. If buyers don't come in, then we can have a crisis situation which happens every so often. Think 2008. The stock can just completely fall apart. But then in most cases there will be a bottom and a huge v-recovery.
Now let's think about how this fits into the post-earnings performance analysis. I think it actually fits in quite perfectly. If Apple were to capitulate on Monday, November 21, 2011 and begin to rebound by Wednesday, then Apple will probably get a pretty sizable week-6 rally. Then from there, it may re-test the Monday lows sometime in Week 7 or Week 8. After Week 8 (December 14, 2011), the stock goes on a major rally heading into January earnings.
I think the technicals and the performance analysis are in completely alignment. This is a good thing for anyone looking for a January rally. Now if the stock does see capitulation on Monday, November 21, 2011, the only question from there is whether the stock is able to outperform the broader market. That is the very last concern and that is something we will have to watch out for over the next few weeks.
Notice that Apple has already seen a substantial correction ahead of the broader market. So the stock can easily bottom way before the market does. Obviously it would help tremendously if the market were to bottom at the same time at least for the short-term. So for example, if Apple capitulates on Monday, it would be good to see the market have a short-term bottom with Apple. That way when Apple bounces, it's doing so while the market is green. That could help kick-start the rebound.
3. How to Position in the January Leg
To be continued...