The Apple November 2012 Game-Plan

Sunday, November 4, 2012 -- The absolute worst thing you can do as investor is rely too heavily on any one single indicator, discipline or theory when trying to determine the price-direction of Apple or any stock for that matter. Right now, you're hearing all types of different theories advanced for why this correction is different and why Apple won't recover much from its lows until after fiscal Q1 2012 earnings are reported. Pure technical analysts were argue -- as they did in November 2011 and May 2012 -- that Apple has much lower to go given the strength of the down momentum and given that we haven't seen positive divergence yet. If you remember, Seeking Alpha refused to publish our article on why we felt Apple had bottomed on May 18 because they felt that Apple trading down to a 30 RSI suggested that it had lower to go. That's because from a purely momentum point of view, that is what is what they have learned to conclude. The same goes for most other technical analysts.

But technicals, fundamentals, valuation, sentiment, seasonality and trending should never be read in isolation and to the exclusion of all of the other evidence. You could have a situation where one disciple suggests Apple should go lower while all of the others suggest that Apple should go higher. Neglecting to consider what is indicate by the other disciplines will simply lead you down the wrong path. And we're seeing a lot of that going on right now.

You're starting to see all types of different theories postulated right now which are completely discounting the technical, seasonality and historical evidence sitting right in front of us. I even see people trying to argue that Apple won't go above $600 this quarter. That's how insane people have become in light of Friday's capitulation. I'm calling Friday capitulation because it has all of the earmarkings of what capitulation looks like. In fact, I explained even before hand that Apple could very well see $574 a share if the stock were to have a traditional capitulation bottom. Until Apple proves otherwise with real evidence, I'm going to assume that the stock has followed the same pattern it has gone through countless times in the past.

We're going to do a few things in this report. First, we're going to demonstrate why we believe Apple capitulated and bottomed on Friday, November 2, 2012. Second, we're going to give a forecast as to why we believe Apple is gearing up for a major rally now. And finally, we're going to consider different "what if" scenarios including everyone's favorite "what if this time is different?" The most annoying question in the investing world.

Before I begin, I should say that there is no way to know anything for certain. Not by a long shot. Everything we do here at Bullish Cross is all probability based. Right now we are stating that we believe Apple has bottomed. Why? Because the probability suggests that it has bottomed. Now should we get credit if Apple bottoms and rallies to $700 a share? I don't think so. Why? Because I'm just stating the most probable outcome.

If instead Apple bottoms, rebounds and then sells-off further to get down to $550 a share, does that mean we should be said to have gotten it wrong? No. Not at all. In fact, even characterizing it in terms of right and wrong is to completely miss the entire point of the investing.

When making a decision, you have to consider the evidence before you. Nothing more and nothing less. And that is what we are going to do here. We merely going to lay out why it is that we believe Apple has bottomed. Whether Apple actually bottoms here or not is completely irrelevant to the analysis. We don't know the future and we don't have a crystal ball. We are merely just laying out the most probable outcome given the evidence. In fact, you are totally free to arrive at a different conclusion. The evidence might not mean as much to you as it does to me. Maybe you think it isn't well founded. But all we can really do is lay out the evidence and give you our take on it. So let's begin.

Point #1. Apple Capitulates on Friday's
In the last three major Apple corrections -- June 2011, November 2011 and May 2012 -- Apple capitulated on a Friday and bottomed on the following Monday. It formed the basis of its lows on a Friday and then set-up to make a huge rebound by Monday or Tuesday of the following week.

On Friday, June 17, 2011 Apple fell below the 200-day moving average which was the day we published our 4th buy recommendation on Apple. On Monday, the stock saw further selling pressure as it hit a low of $310.50, bounced all the way back and closed the session near its highs. On Tuesday, the stock was off to the races.

On Friday, November 25, 2011, Apple closed the session right near the lows of the day at $363 a share which put it nearly $4.00 under the 200-day moving average. The mood at Bullish Cross was nearly just as depressed as it is today. People were sitting on 70% drawdowns in their portfolios. On Monday, Apple opened the session up $10.00. And that was all she wrote. Apple went bye bye on its way to $430 a share by options expiration -- that was a fresh all-time high for Apple.

On Friday, May 18, 2012, Apple fell all the way down to $522.18 a share which put the stock at a 12.71 P/E ratio. Apple then ended the session near $530.38. In reality, Apple never actually fell to $522.18. The problem is that it was a booked trade. Even though the stock really traded to a low of like $528.00, the trade was booked and is still there as the low of the day. It was never corrected. So it is part of the history and algos are definitely built on that assumption. So there really wasn't a hammer that day. Apple just closed a few points off the lows. That next Monday, May 21, 2012, Apple opened the day up $4.50, drifted higher all session long and then skyrocketed mid-session to close the day up more than $30.00 a share. Friday was confirmed as capitulation day. Apple ended the session at $561.28 that following Monday. People went from thinking that Apple would go back under $500 a share over the weekend to thinking the correction is now over.

So this is point #1. Notice that I'm not relying just on point #1 -- Apple bottoms on all Fridays -- to make my entire case. You never want to do that. This is point #1 out several many that are coming. And this point is just merely intended to make you aware of the fact that there is this recurring behavior we are seeing out of Apple in terms of the timing of its bottoms. And that is to say that we tend to see Apple capitulate on a Friday which allows for the sentiment fester over the weekend ahead of its bottom on Monday. That has been the modus operandi of Apple capitulation.

Point #2. Apple Correction Last 6-Weeks Exactly
Speaking of timing, the last two major Apple correction we had lasted 6-weeks exactly. Why? Who the hell knows. But it's interesting that we do see a recurring pattern here. What's more, Friday's trading action seems to lend further support to this theory. Why? Because Friday's trading action itself highly suggests that Apple may have bottomed. And that would make this the third consecutive correction which lasted precisely six trading weeks. In fact, both the November 2011 and the May 2012 correction both lasted precisely 29 trading sessions. Because the market was closed on Monday and Tuesday of last week on account of rain, this correction has lated precisely 27 to 28 days depending on whether you consider the day Apple topped on September OPX as part of the correction.

Now why is this important? Because it might say something about the Apple bear cycle, and Apple sentiment cycle. Maybe these things last 6-weeks +/- a day or two because that is as much irrationality that can exist for Apple. Maybe people get bored and perhaps this is all orchestrated. But I do find it pretty odd that Apple tested the 200-day moving average and/or saw off-the-chart technical extremes on the same exact day -- Friday of week 6 in the correction -- over the past three corrections including this current one.

Don't you find that a tad bit odd? In all three cases, Apple hit a 30 RSI on that day. We've been looking for Apple to hit a 30 RSI on the daily for like weeks now. Doesn't it seem curious that it would happen exactly on Friday of week 6 this time as well? That's not the only technical extreme either as you will soon see. But with the last three correction (including this one) Apple reached some peak extremes at the end of the 6th week exactly.

Point #3. Apple Corrections are 16-18% in Depth
Along with lasting exactly 6-weeks in length and capitulating on Friday of Week 6, the last three Apple corrections were nearly the same size. Almost identical really. The May 2012 correction lasted precisely 29 days and brought Apple down from $644 down to $522.18. That was a $121.82 correction from peak to trough. The total size of the sell-off was 18.92% exactly.

The November 2012 correction lasted precisely 29 days, and brought Apple down from $425.00 to $363.32. That was a $61.68 correction from peak to trough. The total size of the sell-off was 14.58%. Not quite the same size as May, but pretty damn close. We're talking like a few sessions of points here. Not all correction have to be EXACTLY the same. But this one was similar enough in size, time and dimension as the May 2012 correction.

If Friday was indeed the low, and if Apple gaps-up on Monday (as I expect it will), then the low point in this correction would be exactly $574.75. The would make this correction $130.25 from peak to trough. The total size of the sell-off would come in at exactly 18.47%. That is more or less than same size and duration as the May correction. In fact, it would make this correction a tad-bit smaller.

Now why is this important? Because when taken together with the fact that Apple capitulates on Fridays, corrects over a 6-week period and even loses the same amount of percentage points, it begins to look like as if these corrections are sort of just part of the natural cycle of things. It's run-of-the-mill.

It's a known fact that history repeats itself. This is not the first 18% correction Apple has seen and definitely won't be the last. And I'm willing to bet we see another 6-week correction that spans 18% and capitulates on Friday a few times next year.

These three points taken together sort of make their own broad point and answer a very important set of questions. And that is this. Right now, we're trying to determine whether the course of history has changed with Apple right? Is this correction the big one? Have things changed with Apple? Is Apple going to recover? Will we see lower prices?

I think being able to answer that questions is partly determine by whether we see any major difference in the way this sell-off has transpired relative to how other sells-offs have transpired in the past.

Just think about it logically. The first place you want to look is the size, and duration. If this correction had been going on for several weeks or even months longer than anything Apple has experienced in the past or if the size of the correction seems so incredibly large than anything we've seen recently, that would begin to point toward telling us that maybe things are different.

But the when the size, shape, duration and character of the sell-off is just like others in the past, then we can at least say nothing in the way of how the sell-off itself is unfolding is indicative of a more sinister outcome than what we've seen in the past.

Point #4. Apple Capitulates at a 30 RSI
The one recurring theme we have seen with Apple since 2009 is that it capitulates on the day that it closes between a 29 to 31 RSI on the 14-day time-frame. If the stock closes at that level, we have seen Apple bottom in every past event.

In fact, since the lows of the failnancial crisis, we have only ever seen Apple close at or under a 32.60 RSI on a total of four occasions. That's it. On only four days ever since March 2009 have we seen Apple close at or under a 32.6. In all previous cases, that day was the low for the stock. What's more, each time it happened, it immediately preceded a massive rally of epic proportions.

In August 2010, Apple closed at a 32.6 RSI before going on a 3-month joy ride up to 48% in the green. On June 20, 2011, Apple closed the day at a 30.50 RSI. After doing so, the stock rallied 30.27% in one-month. And that was the exact day that Apple bottomed. The third time we saw this happen was on May 18, 2012 when Apple closed at a 30.45 RSI. The next day Apple rallied 6% for no fundamentally driven reason whatsoever, and then continued that rally up 18.4% in just 30-days time -- four months later the stock was up over 35%.

This is not an indicator to be taken lightly by the bears. In fact, it's stupid suicidal to do so. Let me ask you this? Knowing this, would you feel more comfortable shorting Apple at these levels or going long at these levels? The only time Apple has seen a sub-30 RSI was during the financial crisis and that was for a very brief period of time. That's it.

The final thing to remember here is that the last three times Apple closed near a 30 RSI, it meant capitulation for the stock. Within a week, the stock was significantly higher in every single case without exception. Within two weeks, it was up almost double-digit percentages.

Point #5: Apple capitulates at or under the 200-day Moving Average
Another hallmark of capitulation for Apple is the 200-day moving average. Apple has capitulated, bottomed and then went on a rip-your-face rally after every time it has ever hit or fallen under the 200-day moving average. But get this. In the May correction, Apple hit a 30 RSI but didn't reach the 200-day. In the November correction, Apple hit the 200-day but never reached a 30 RSI. The last time we saw Apple hit both the 200-day and a 30 RSI was in June 2011 after an extended multi-month sell-off.

The last three times Apple came within 1% of the 200-day moving average, the stock rallied 11.49%, 14.64% and 24.14% exactly 20-sessions later in each case. So four-weeks after first reaching the 200-day moving average, that was the following result. If you extend that out to 40-days later, the numbers were 23.47%, 18.43% and 31.67%. That is over the ensuing 8-week period. From Friday's close, that would be the equivalent of Apple reaching $712, $682 or $758 by mid-December. That is what happened after Apple corrected down to the 200-day moving average in every past post-March 2009 lows event.

Please notice that the 200-day moving average and 30-RSI are two totally independent and very significant indicators for Apple. These are perhaps two of the largest technical indicators in support of Apple bottoming this past Friday.

Whenever Apple has breached the 200-day, that has been an excellent indication of capitulation.

Point #6: Apple Capitulates at a 12.9 to 13.1 P/E Trailing P/E Ratio
On the valuation side of things, one recurring sign of Apple bottoming is when the stock reaches a very low valuation as represented by its trailing P/E ratio. Historically speaking, anytime Apple's P/E ratio has fallen exactly to 13 or just under 13, it has bottomed on that very trading session. Notice there is a big difference between Apple's P/E ratio compressing under 13 as a result of reporting a dramatic increase in its TTM earnings, and Apple falling under a 13 P/E ratio as a result of a sell-off.

Historically speaking, that difference has been very significant. As a matter of fact, there were two instances where Apple's P/E ratio either fell under a 13 P/E ratio or almost fell under a 13 P/E ratio and in both cases, Apple capitulated on that very trading session. In the November 2011 correction, Apple's P/E ratio fell to a low point of 13.13 during the sell-off, and that lead to capitulation for the stock. In the May 2012 correction, Apple's P/E ratio briefly fell under 13 when the stock capitulated down near the $530 level. It was a one-day event. And on that very day, Apple capitulated.

This past Friday, Apple's P/E ratio came down to a 13.01 at the lows of the day. That was from a high-point of 13.5 on the trading session. So in a lot of ways, Friday's collapse in Apple's valuation transpired very much in the same way we saw it happen in both November 2011 and May 2012. What's more, Apple has tended to trade down in this extreme low 13-area pretty much in every quarter in 2012. In fact, it was only in Apple's recently ended fiscal Q4 trading quarter where the P/E ratio didn't fall to the high 12 to low 13 area. After missing Q3 2012 expectations, Apple's P/E ratio fell to a 13.39 level at the lows of the quarter.

Thus, like November 2011 where Apple's P/E ratio collapsed down to a 13.13 level and like May 2012 where Apple's P/E fell to a low of 12.72 (booked false trade), Apple's P/E ratio in this October - November 2012 capitulation fell to a low of 13.01. This is yet another indication that Friday was capitulation for Apple and that the stock is ready to enter its next phase which is presumably a big up phase for the stock. Compare the P/E lows of the last several quarters for Apple.

In the chart above, you will notice that Apple's P/E ratio came down to a low of 12.62 in Fiscal Q2 2012 and to a low of 12.91 in Fiscal Q3 2012. The 12.62 you see in fiscal Q2 2012 was the result of earnings-based compression. Apple's massive increase in TTM as a result of blowout Q1 2012 earnings brought Apple's P/E ratio down from a 15.4 to a 12.6 overnight. But that was immediately corrected in a parabolic rally. That parabolic rally tells you just how serious buyers take this valuation issue with Apple. Apple had already been rallying 17% when it reported earnings. It then gapped-up, became extremely overbought and still skyrocketed further as a result of trading at such a depressed valuation. What does that tell you about Apple trading down here at a 13.01 P/E but extremely oversold. Use some common sense here.

If Apple skyrocketed despite being extremely overbought just because its valuation was too low for a brief moment of time, what do you think is going to happen when its valuation becomes almost as cheap just as Apple's stock is hitting the 200-day moving average and reaching extremely oversold conditions at a 30 RSI. And this is happening when bearish sentiment is reaching a peak extreme. Use common sense. That's all I can really say here. This chart below shows Apple's trading behavior over the past year. Notice how it spends almost no time under that 13 P/E ratio range represented by the "purple shaded area." Thanks to user exNeXT for this chart:

What this chart should show you is that while Apple will trade down to the 13 P/E ratio area, typically speaking, it will capitulate and bottom at a 12.7 to 13.1. Whether that is the result of earnings-based compression or the result of a correction, Apple has spent very few sessions trading under 13. We're talking one hand. And when you add low-13's to that, it's still a very small list. Apple closed at a 13.06 on Friday. That makes Friday's close part of a very small club.

In fact, if you go back and look at the top-15 lowest valuation days in Apple's modern post-iPod history, Friday's low was the 12th lowest valuation day ever. And yet that number is quite skewed. A full eight out of those fifteen days happened all at the same time as a result of overnight earnings-based compression. In fact, the top four lowest P/E ratio days happened on the four days after Apple reported Q1 2012. It took Apple a full 10-days to work its way completely out of that record low P/E ratio range after earnings.

But if you discount those days and only really look at instances where Apple's valuation hit extremes as a result of a correction, you will notice that Friday's lows fell in the top-5 lowest P/E ratios to hit the stock as a result of a correction. And what we're trying to point out here is that Friday, November 2, 2012 goes down as a capitulation day because anytime we've seen Apple hit these types of extremes -- as noted in this table below -- you will see that it has meant a capitulation for Apple. In May 2012, that capitulation point was really somewhere around 12.92. In November 2011, that capitulation point was around 13.13. And on Friday, Apple hit a low point of 13.01. That is pretty much right in line with what we saw on capitulation Friday, November 25, 2011, and on capitulation Friday, May 18, 2012.

Finally, don't you think it means something quite significant that Apple has reached the 12th lowest valuation in its modern history just as the stock breaches the 200-day moving average and closes under a 30-RSI on the daily. It's a pretty big deal. The 12th lowest valuation day in Apple's history. 4th lowest as a result of a correction.

Point #7: Apple Capitulates when it Closes Far Below its Lower B-Band
What you should understand about the lower b-band analysis is that it amplifies all of the other indicators. In fact, all of the indicators really amplify each other. The fact that Apple is at a 30 RSI really amplifies the fact that it is at a 13.01 P/E ratio. The fact that Apple is at a 30 RSI makes it more likely that Apple holds the 200-day moving average because it is so oversold now. Apple closing far below the lower b-band all but ensures it.

First, it's important to understand that Apple bottoms in most cases whenever it either falls far under or closes well under its lower b-band. That has been the one recurring and highly accurate indicator for calling both tops and bottoms for Apple. And it works both near-term and intermediate-term.

But when you extend the analysis to capitulation, it is important that all of these other indicators are present as they are. It all but almost guarantees capitulation has happened. The fact that Apple closed well below its lower b-band dramatically increases the likelihood that these indicators will work this time as they have in the past. It increases the merit that these indicators stand upon. The minute any doubt as to whether Friday is capitulation creeps into your mind, this deep close below the lower b-band quickly extinguishes that worry.

That is how important the lower b-band is to the capitulation argument. As you can see from the chart below, every time Apple has either opened and closed or fallen deeply under or closed deeply below the lower b-band, it has meant a bottom for the stock. It has solidified capitulation when the other indicators are present. The first chart below shows each time Apple has hit the lower b-band over the past three years and what had ensues shortly thereafter. The next three charts break that down by each year from 2009 to 2012:

A. 2011 - 2012 Lower B-Band Days

B. 2010 - 2011 Lower B-Band Days

C. 2009 - 2010 Lower B-Band Days

The most important thing to take away from the b-band analysis is this. Days where Apple opens and closes below its lower b-band on a session as well as days where Apple has closed deeply below the lower b-band will tend to validate the indicator. The deeper Apple closes below the lower b-band, the more compelling the evidence.

Also, repeating what we noted above there is an almost symbiotic-type relationship between the lower b-band and other extreme indicators. When Apple closes well below its lower b-band at the same time while closing at a very low RSI and below the 200-day all together point toward capitulation.

Another point worth noting is that whenever Apple spends a long time riding along the lower b-band, that is also a huge indicator that capitulation is coming and that the trend will soon change. The same goes -- to a lesser extent -- on the upside. As Apple rides along its upper b-band and eventually has a session where it closes way above the upper b-band, that is typically a big warning sign for a top.

Apple has spent quite a long time riding along its lower b-band in this correction. In fact, it has spent more time riding along the lower b-band in this correction than in any other recent correction since 2009. The two periods that most closely resemble this one was the period between May and June 2011, and between October and November 2011. In the May correction, Apple didn't really spend a lot of time at the lower b-band. However, it did in fact, fall below it on the May capitulation day. As you can see above, Apple was either at or below its lower b-band in every single bottom of every correction.

On Friday, Apple closed $5.26 below its lower b-band and nearly $50.00 below its middle b-band and almost $100 below the upper b-band. Those are typically big indicators. Apple tends to bounce at least to the middle b-band after having a key breach below the lower b-band. The same holds true at the upper b-band. Go back and look at what has ensued whenever Apple has either breached the upper or lower b-band. Notice the very next move. Get ready to have an ah-ha moment.

As we noted in section I above, it's pretty clear that Apple has probably capitulated. The stock has probably bottomed. In fact, the last few times it has done this, we have seen a pretty big gain on the following Monday - Tuesday period.

But the big question obviously is what is to follow? How far will the rebound go from here? What can we expect? The answer to that question really depends on how you view the current situation with Apple.

On a purely historical basis, Apple has fully recovered its entire correction over the ensuing 6-8 week period based on an analysis of each indicator. Anytime Apple has hit a 30 RSI, it has lead to a very substantial rally which has put Apple well above the equivalent of $700 a share by mid-December. Anytime Apple has hit the 200-day moving average, the consequences has been largely the same as the 30 RSI.

Notice these are two totally different indicators. We've seen Apple produces similar results when only 1 indicator was present. There has never been a case where Apple didn't see a very substantial recovery and fresh all-time highs off of a test of the 200-day or off of a capitulation off of the 14-Day 30-RSI.

What's more? Every correction that Apple has gone through has been completely erased with a v-recovery. The November 2011 correction took 29 days to complete and Apple fully erased those losses on the ensuing 29-day period. The May 2012 correction lasted exactly 29 days and those losses were largely erased over the ensuing 33-day period.

So from a purely historical perspective, Apple should rebound back up to $700 a share by mid-December. That is precisely what has happened after each of its preceding corrections, and that is precisely what has happened after Apple hit a 30 RSI or fell at or under the 200-day moving average. Here's what the recovery would look like under normal circumstances. We would normally see a v-recovery:

Yet, obviously it is perfectly reasonable and possible that Apple won't follow its historic trend given the overly negative sentiment and weak market conditions Apple faces at the current moment. In every previous capitulation, it wasn't only Apple that was capitulating, it was the whole market that was capitulating. What if the market weakness gets in the way of Apple's recovery? It's possible that this could happen. But then again, the market isn't too far away from a bottom itself. With the election soon approaching, that uncertainty will be out of the way and the market will probably rally just on account of removal of the uncertainty.

But even then, there is the possibility that Apple doesn't have a full v-recovery has it has in the past. Notice, that we don't have any real evidence to suggest otherwise given that every previous historical outcome has been to see Apple rally back up to $700 a share, but if Apple did fall short, we will discuss how that could possibly happen and where the highs could be for the quarter.

First, it's important to understand that there hasn't been a solitary quarter in Apple's history where it didn't spend at least some time trading near a 15 P/E ratio. Even though Apple does come down to test the low 13's and even high 12's in a lot of cases, we still haven't seen a quarter where Apple didn't at least hit a high of 15 sometime during the quarter.

Based on the current TTM of $44.15, a 15 P/E ratio for Apple would put the stock at $662.25. That's if Apple hit a peak P/E high of 15 during the quarter. So now let's think about the implications of that. From a technical point of view, if Apple takes out the $650 level, it has nothing but open space all the way up to $680 a share. The key areas of resistance for Apple are $600, $610, $623, $635 and $650. If Apple takes out each of those levels, it's not going to then top out at $662.25. That won't happen. Apple is either going to fail to push past $650 or it's going to push past $650 and struggle with $680.

That could then cause someone to merely ask, "why can't Apple just merely top out at $650?" Well that's a very good question. At $650 a share, Apple would reach a P/E ratio high of 14.7. I think that would be on the extreme low end of the quarter. You have to remember that Apple tends to average higher than that in most quarters. Even last quarter the P/E average was 15.30 in spite of the correction we saw:

That being said, if Apple were to experience further P/E compression, it is definitely possible that Apple could peak out at $650 a share. Yet, if that were the case, I'm fairly certain we would see that level very early on the quarter given the capitulation we had on Friday. The rally up to $650 a share up from $576 would only be 12.84%. That would be the smallest 8-week recovery that Apple has ever seen off of either the 30-RSI or off of the 200-day moving average. It would also be the smallest post-corrrection recovery we had ever seen.

Now it's really important to understand that even really broken stocks that are fundamentally garbage undergo 50% retracements of each leg down. The only difference between a fundamentally sound company in an uptrend and a fundamentally broken company in a downtrend is that a fundamental sound company retraces 50% of its rallies while fundamentally broken companies retrace 50% of the loses. Every stock -- good or bad -- will retrace half of its correction before going lower. So what does that mean exactly? Well, we know Friday was capitulation. There is really no doubt about that. Apple has bottomed. Whether it makes an incremental new low or gaps up on Monday is irrelevant. The stock is done going down for now at least. And what's more, the initial rebound will tend to erase half of the losses.

In this case, Apple lost $130.00 more or less. That means at a minimum, it is due for a $65.00 rebound from $576 a share. That would mean Apple is due to rebound up to $641.00 a share over something like a 2-week period of time. Do you honestly think that Apple would only go up to $641 and not test $650? Fat chance.

No. I think Apple testing $650 within the next four-week period is almost in the bag. That's a level that Apple will test early on in the quarter. And I think because of that simple truth, it does suggest Apple is likely to test the $680 level at least.

And here's precisely why I believe that is the case. If you analyze Apple's intra-quarter P/E levels, you will see that Apple has only ever spent a total of 4 days trading under a 14 P/E ratio during the last 20-days of any quarter. Three of those days Apple traded between a 13 and 14 P/E ratio during the trading day and in only one of those sessions did Apple trade exclusively under a 14 P/E for the entire day.

Here is what I mean by this. If you go back and add the last 20 trading sessions of each quarter over the last 4-quarters, that would add-up to exactly 80-days. Out of those 80-days, there were only 4 sessions where Apple saw a 13.5+ P/E print at any time during the day. There was only 1 day out of those 80 where Apple traded exclusively under a 14 P/E ratio for the entire day. That means, there was one session where Apple opened under a 14 P/E, hit a high of the day that was under a 14 P/E and closed at under a 14 P/E. Just one day out of 80 days. And then there were three other days where Apple spent some time of the session under 14 and part of the session over 14.

Now why is this significant? It's significant because what this shows you is that in those instances where Apple trades down toward a 13 P/E as a result of a correction, the tendency is to see that entirely reversed by the time you get into the last 20 trading sessions of the quarter. In 79 out of those 80 trading sessions, Apple traded above a 14 P/E ratio. For this quarter, a 14 P/E ratio would be anything above $618.20 a share. That means you can expect that during the last 20-sessoins of the quarter, Apple will likely be trading far above $618.20 a share.

The only reason we only looked at the last four quarters is because it was only four quarters ago that Apple spent any real time under a 14 P/E ratio. If you go back to the fifth quarter, Apple literally only spent 1-day under a 14 P/E ratio period. So it makes sense to only review the previous four trading quarters not counting this present quarter obvious since we still haven't hit the last 20-days of the quarter.

Now there are other parts of this analysis which are very important. When you extend this analysis out to cover the entire trading quarter, what you will find is that Apple doesn't spend a whole lot of time trading exclusively under a 14 P/E ratio in any quarter. In fact, when you look at the last four fiscal quarters, the average quarter spanned between 63 and 66 total trading sessions. Of those 63 to 66 trading sessions, Apple has spent 51, 52, 43, and 63 days trading above a 14 P/E ratio respectively.

So why does this matter? Because as you can see, in everyone one of Apple's previous four quarters, Apple would have spent at least 66% to 75% of the quarter trading above the equivalent of $618.20. In some of those sessions Apple would have spent both time above $618.20 and time below $618.20 at the same time and in the same day. But as you can see from the chart below, most of the quarter is spent at least above that level:

Now even more compelling is this column labeled "Exclusively 14+." This column shows the number of days where Apple never saw a 13 print in any part of the trading sessions. What you should notice is that in the worst valuation quarter of Apple's history -- fiscal Q3 2012 or April to July 2012 -- Apple spent only 29 days trading exclusively above a 14 P/E ratio. That means, if we extended that out to this quarter, it would be the same as saying that Apple would spent at least half of this quarter trading above $618.20. And that in half the quarter, in no part of the trading day would Apple fall under $618.20.

Now here is why that is extremely important. It's important because it suggests that Apple is very likely to test the upper $600's during the quarter. Because Apple won't spent so much time trading above $618.20 and not do anything in the process.

You need to understand that Apple isn't a company that trades sideways. It's either trending higher or lower. In the worst quarter that we have seen, Apple spent 29 days trading exclusively above a 14 P/E ratio. The key areas of resistance are $610, $623, $635 and $650 on the low-end. On the high end, it's $680 and then $700. There are some minor levels of resistance in between $650 and $680 a share.

As compelling as this analysis is, there's a huge caveat to each of these columns. There's a huge difference about this quarter than previous quarter which can prove to be either extremely positive or rather negative for Apple investors.

In each of these quarter where Apple spent a whole lot of time trading under a 14 P/E ratio, it was largely due to the fact that Apple was just beginning its process of correcting. A lot of the sessions that make up the 36 days Apple spent trading between a 12.5 to 13.99 P/E ratio during fiscal Q3 2012 were on the way down.

Unlike this quarter where the quarter started nearly 5-weeks before earnings were even reported, in fiscal Q3 2012, Apple only started its correction two weeks ahead of its earnings. Apple then spent an additional four weeks trending lower throughout the entire quarter before it hit capitulation. In fiscal Q1 2012, where Apple spent 22 days trading in the 13 P/E range, that correction started the day after it reported its results. Apple spent 6-weeks selling off throughout the quarter before bottoming. So a lot of those sessions were on the way down.

It's very possible that we could be seeing a set-up where Apple spends far fewer days under a 14 P/E ratio as a result of the timing of this correction. Notice it wasn't until more than a month into the quarter where Apple saw a 13-flat or sub-13 P/E in each of the October 2011 and May 2012 corrections.

What this tells you is that even though Apple spent only 29 exclusive days trading above a 14 P/E ratio in fiscal Q3 2012, there is a very compelling case to be made that Apple will spend far more than only 29 days at 14+ during this quarter.

Now the bottom line in all of this analysis is this. Historically speaking, Apple does not spend a whole lot of time trading under a 14 P/E ratio. In fact, it spends far more time trading above it than it does below it. And even in those quarters where Apple does spend a lot of time under a 14 P/E ratio, it's typically because the correction began at the start of the quarter and by the time Apple had capitulated and rebounded, it ended up resulting in Apple spending a lot of time above 14.

Unless things have dramatically changed, Apple should not spend a whole lot of time trading under $600 a share. At $600 a share exactly, Apple trades at a 13.59 P/E ratio. So those who have been arguing that this could be the case, don't even realize the implications of their conclusions. It would be a very extreme set of circumstances for a company like Apple to spend a lot of time trading under a 14 P/E ratio.

The final point we need to make with regards to the intra-quarter P/E analysis is this. There has never been a solitary instance were Apple traded below a 14 P/E ratio during the last 15-days of any quarter. It hasn't happened. As a matter of fact, if you look at the last 15-days of any quarter, Apple has spent 61.7% of the time trading above a 15 P/E ratio and it has spent 50% of the time trading exclusively above a 15 P/E ratio. That means in half the time, Apple never sees a 14 print during the last 15-days heading into its earnings report. If Apple continues that tradition, then it should spend about half of its days sitting above $662.25 a share as it heads into January earnings.

Now the last point we need to make on the historical analysis is this. Because of the timing of this correction, Apple seems to have bottomed a mere 4 trading days into the quarter. In most cases, it isn't before 19 to 29 days into the quarter where Apple has reached a bottom.

Yet, even in those corrections where the capitulation bottom didn't occur until 19 to 29 trading days into the quarter, Apple still had plenty of time to fully recover its losses by the end of the quarter. In fact, it has largely recovered those losses with a lot of time to spare. It often even makes new highs as it heads into earnings.

This is important because it is very easy to lose sight of the amount of time Apple has ahead of it until January options expiration and what Apple is capable of doing during that time. It is also quite easy to lose sight of the fact that Apple has put up its biggest and best rallies during periods where there were no catalysts.

Just this year, we have seen Apple deliver huge rallies over two-month period of time. Apple's January options expiration is nearly 57 trading sessions from now -- give or take a day or two. And it's not any 55-sessions period, it's a 55-sessions period after Apple tested the 200-day moving average and hit a 30 RSI on the 14-day. It's 55-days after Apple closed $5.00 below its lower b-band. It's not just an average 55-sessions period.

Any 55-sessions period would be more than enough time for Apple to rally to $700+ a share. I think if you're going to introduce "what if's" into the equation, you should think about the very reasonable "what if's." What if Apple trades as it normally does after hitting the 200-day and reaching a 30-RSI? What if it trades as it normally does after reaching a 13 P/E ratio?

In previous quarters, Apple didn't reach these levels until 19 to 29 days into the quarter. That's almost half of the time? What if Apple reached capitulation on April 28 instead of on May 18? What if it hit capitulation on October 25 instead of on November 25? What would have happened in those cases? How much higher would Apple have gone?

Over a 55-trading session period of time, Apple could easily reach $750 a share. In fact, it is just as likely or more likely than any of the other "what if Apple fails" that are postulated daily. Think about it. Capitulation is happening at trading day #6 into the quarter versus trading day #19 in the May correction or trading day #29 in the November 2011 correction.

If you take a look at how Apple has performed on the ensuing 60-trading sessions period after Apple hit the 200-day moving average in November 2011, June 2011 and August 2010, those numbers were 42.74%, 19.35% and 33.60%. If Apple matched that performance, the stock would rally to $822.18, $688.00 and $770.00 a share respectively. In the May correction, Apple didn't quite hit the 200-day moving average. But it did bounce 18.4% over the ensuing 30-day period. That would put Apple at $682.00 a share.

So there are some "what if's" for you. Now let's talk about the "what if everything fails" scenario. Well as we outlined above, Apple is likely to retrace half the losses up to $641.00 a share just for the rebound. That would likely result in Apple touching $650 at least. After that, Apple could trend lower throughout the quarter.

But from these levels down here at a sub-30 RSI on the daily and on a deep loss under the lower b-band, there is going to be a very significant rebound no matter what. The technicals have been working just fine. The 60 minute RSI and 60 minute Chaikin Oscillator are both functioning. That analysis extends to the daily.

Whenever the daily RSI or daily Chaikin Oscillator becomes extremely oversold, you get the same result on the 60-minute, but instead of seeing 7-10 hourly bars in the green, you tend to see 7-10 daily bars in the green.

That's where Apple sits right now. At a very bare minimum, Apple is going to see a dramatic rebound. Now after that rebound, then maybe things could be different. We don't have evidence to suggest that they are. But perhaps they could be. But at this point, given how oversold Apple is, the stock is due for at least a $60 to $65 rebound just on account of oversold conditions. That's not event taking into account the 50% retracement.

Now let's consider what the actual "this time is different" might look like. Apple already hit a 13.01 P/E ratio. There really isn't a whole lot more you can expect out of the stock on the downside in terms of valuation. But I guess the stock could always hit new fresh all-time lows on the valuation side of the equation.

But again, I just don't see the basis for that to happen. Even with weak guidance and weak expected TTM, even with those variables, it's not enough to warrant such an extremely low valuation. Especially, now that everyone understands the product cycle and what that means for 2013. But sure, that what if could happen. Apple could trade down to a 12.5 P/E ratio.

But from a technical point of view, it's due for a very significant bounce between now and then. The biggest problem with the "what if" scenarios is that they could always be extended out to any scenario. Especially, when we are just ignoring all logic and reasons or a rational basis for believing in any of these "what if's"

For example, someone can always ask, "what if Apple trends down to a 19 RSI on the 14-day and falls $70 below its lower b-band?" Ok. How am I supposed to answer that? The possibility of that happening is extremely slim. But it's not zero. What if Apple trades at a 10 P/E ratio putting it at $441.00 a share? Also very possible, but not very plausible, probable or likely.

While anything is possible, we just laid out several different very compelling reasons for why Apple is setting up to rebound very likely to $700 a share by mid-December. Could things be different? Sure. They can. But that is always the case with investing.

31 responses to “The Apple November 2012 Game-Plan

  1. Very clear, cogent summary. Thanks.

  2. I appreciate this article. Looking forward to your insight once the rebound is underway. Thank you.

  3. ….that’s a lot of writing and reading!
    Thanks Andy.

  4. That’s how you bring back the weekly. Thanks for laying the case, Andy.

  5. Great report. Thx.

  6. Dave Gordon (davegordon14)

    “The four most dangerous words in investing are: ‘this time it’s different'” – Sir John Templeton

  7. Andy,

    What kind of indicators should we be looking for to determine the sustainability of this coming bounce? What volume do we need to see?

    Really appreciate it if you could answer this one since I think it’s the most important question and we were not able to tell the previous bounces would fail. Is it impossible to tell? Or are intraday clues. Thx.

  8. Andy,…Thanks for the thorough report…one of the best set of arguments for where we are and where we should be going you have ever written.

  9. Andy, maybe I missed it but can you post a graph with the ChiOsc? Also, for those with cash, what bailout spreads would you recommend? In fact, how would you position now if you started with 100% cash and wanted to put this to work? Thanks

    • I would buy the January 2013 $580 – $600 call-spread with 50% of my capital, and the $900 – $1000 January 2014 spread with the other 50%. That’s how I would do it right now with a 100% cash position just starting out. I’m confident Apple goes to $600+ by January 2013. That would double your money and pay for your $900 – $1000 call-spread. The $900 -$1000 would essentially be free.

      Then I would take the cash position and wait for Apple to reach $630 by late February or early March and then buy the $700 – $800 January 2013 spread with that capital. That Jan 2014 $700 – $800 spread would completely off-set the $900 – $1000 spread.

      The total return if all goes well would be something close to 15x over the next 14-months.

  10. I hope everyone realizes the magnitude of what had to transpire to hit some of the points in this article:
    1. Capitulations are on Fridays.
    2. 29 Sessions.

    Does everyone see how the universe bent itself to making this happen? If not, let me tell you:
    it took a freakin’ hurricane that managed to shut wall street down for two days, which hasn’t happened in 100 years!!!
    In other words: there is some very serious shit going on, to make all this happen in the way it had to.

    Or, maybe it’s just a coincidence. :)

  11. Very compelling reasoning. Makes sense to me. I am on board, have been all along.

  12. How will prices for options at $630 in late February/early March compare to prices right now at $575 (or even maybe $600)? I guess I’m sort of asking how much the time decay factors in. I could go through some heroics to find cash right now to buy 2014 options at these low prices, or wait till I cash in the 2013’s, and rebuy in late Feb/early March as AZ suggests —but not at prices these low. Is there a rough measure of what $630 in a few months from now would equate to right now?

  13. Thanks, Andy! You’ve outdone yourself again – will be bookmarking this for the next big correction. Just one small error: I think the last date in “Lowest P/E ratios” should be November 25 *2011* (I hope :D)

  14. Very compelling article indeed Andy. One quick question – is there any relevance of the 100% retracement of rallies which looks like the case for the July-Sept rally last quarter?

  15. Thanks Andy, for the comprehensive analysis once again. The $NYMO was much lower in earlier cases in June 2011, Nov 2011 and May 2012. Now $NYMO is only -19; how much of an impact that could be in respect of other indicators.

  16. I guess that lots of momentum traders bought puts or short on Friday after breakdown of 200DMA support and hold their positions thinking now 200DMA has become the resistence. They would freak out if the scenario Andy laid out would play out.

  17. Thanks AZ.

  18. I may be sounding like splitting hair, but these are NOT “probability” based scenarios and indicators as you keep referring to them in your articles. This is STATISTICS, quite different!

    An example:

    We throw a fair coin and we observe that the last 3 outcome was the same (all heads or all tails.) STATISTICS suggests that we should bet pretty high that the next result wil be the same. Or maybe I am ‘conservative’ and bet ‘only’ 70% on this. But of course this is WRONG. The next throw will have a 50% chance to be the same, not more.

    What is also important to realize that in a hopping 25% of the cases I WILL see a 3-sequence with the same outcome! So statistics may mislead me.

    As you keep reminding us that hedge funds and such have their full time financial analysts, I also know that they also have scores of mathematicians, statisticians and programmers who know this difference quite well. The granddaddy of all these was of course Ed Thorpe who, using his profound knowledge of PROBABILITIES managed to successfully “Beat the Dealer” (blackjack) and “Beat the Market (option pricing.) A 1-2% anomaly in PROBABILITY can result in HUGE financial gains. But even a 75% anomaly in statistics (as demonstrated above) will ruin you.

    The law of large numbers states that the outcome will converge to its expected value. [This is the real law. Some Apple analysts used the name to argue about Apple’s revenue — those are large numbers too, but different large numbers :-)]

    This theorem (yes, this is a provable theorem, this is not an assumption or an observation) has dozens if not hundreds of consequences and applications. E.g. using this law if we saw 600,000 heads out of a sequence of 1,000,000 throws, we could calculate the PROBABILITY that the coin is not fair. This would be a mathematically ACCURATE probability. This type of calculations are exactly what HFT programs make! They are not out there to screw you. (They only screw you as a side effect :-) They use MILLIONS of data points and calculate the divergence from the mean.

    The point is that there are STATISTICAL methods to determine a relevant sample size. As with our indicators we are not even close to these numbers, I will not bore you with them.

    Our financial gurus (Andy, Nansen, Jason) ‘realize’ recently that the rules of the game changed. I am not convinced about that at all! I would rather see them think in terms of statistics: MAYBE the rules didn’t change AT ALL! Maybe we just didn’t see them clearly (observing 3 heads in a row.)

    Another point is the independence of different variables. If you check the barometer and it is falling you guess that bad weather is coming (or whatever it indicates.) Now you open the TV and you hear the weatherman to predict bad weather and you conclude that now it is MORE likely that bad weather is coming because you saw two indications for that. Of course you are WRONG, because the weatherman’s prediction and the barometer’s are not independent. He did check the barometer too.

    We can calculate the independence of variables (called correlation) using statistical methods. I didn’t do this (and our financial gurus didn’t do it either) but I am pretty certain that most of our indicators do correlate to some extent.

    To clarify: I am NOT saying that Apple’s price, or EPS or correction or bounce are random variables. Of course not. But we should distinguish statistics and probability.


    • Why should we distinguish statistics and probability, you may ask. At the end of the day you _are_ only splitting hair, no?

      Glad you asked.

      Suppose I am Oracle and I offer you a choice:

      I show you a sequence of 10 throws, all heads. (Statistics) I also tell you (being an Oracle) that the probability of the next throw being a head is 50% (Probability.)

      Would you bet $1M ‘only’ 3:1 that the next throw will be a head or rather $1K for 1:1? Smart choice!

      It is important for you to realize (and with all respect, for them too) that our financial gurus are not Oracles talking about probabilities. They are Observers, talking about statistics.

      • Just so you know, I used to tutor statistics in college. I excelled at it stuff. This isn’t a normal statistical analysis as you might think. The individual samples themselves impact the probabilities. There’s a massive difference between coin flips and Apple falling under the 200-day moving average.

        The probability isn’t gained from the sample size. It is derived from the fact that as you reach oversold conditions, each day that a stock becomes more oversold, the chance that it is nearing a bottom increases. Apple can’t go to a 0-RSI. The chances that Apple bottoms at a -50M Chaikin Oscillator is higher than -40M which is higher than -30M. That’s what you’re not getting at all given what you just posted.

        You are completely stuck on sample sizes of inherently 50-50 probability events i.e. coin flips to make your case. But this isn’t a comparable situation. The difference between a sample of coin flips and a sample of oversold conditions is huge:

        When you flip a coin 10x, the 11th time is an independent event and we know the outcome is 50-50. Meaning, the chance that the next coin will be heads or tails isn’t impacted by the previous 10 tosses and we know the event itself is inherently 50-50.

        BUT THAT’S NOT THE CASE IN THE MARKET. Each day that Apple closes lower increase the likelihood that the next trading session is green. So please come off of this. They’re not comparable.

        The probability is partially determined by the event itself man. Apple closing red is not the same as a coin toss. Apple reaching a 30 RSI makes it more likely for the stock to bottom than it reaching a 33 RSI. It reaching 27 RSI makes it even more probable that it bottoms than at a 30 or 33.

        That’s what you are not figuring into the equasion. I’m not saying that because Apple closed at a 30 RSI the past three times and then rocketed higher that it means it will happen on a forth because it is 3 for 3. I’m saying that it is 3 for 3 because a 30 RSI is so low for Apple and that being the case is likely to make it 4 for 4.

        I’ve seen your argument. I’m fully aware of what you are stating. The simple fact of the matter is that you are looking at this the wrong way. Normally, I would agree with you if you were basing this purely on modeling.

        Actually, here you go. The fact that Apple bottomed at a 30 RSI 3 out of the last 3 times is completely and totally meaningless from a purely statistical point of view. Zero. It means nothing. But guess what? Apple will bottom at a 30 RSI because the last three times Apple hit a 30 RSI, it bottomed. Not try to understand why that is the case.

        • Thanks for reading and thanks for your reply.

          Just two quick points:

          (1) You missed the last point I made, so I repeat:

          “To clarify: I am NOT saying that Apple’s price, or EPS or correction or bounce are random variables. Of course not. But we should distinguish statistics and probability.”

          So please don’t insinuate that I am comparing price movements to coin tosses — I do NOT and did NOT.

          (2) You state: “Each day that Apple closes lower increase the likelihood that the next trading session is green.”

          This statement is not correct. If you still remember your statistics, you will realize why not.

          • jozsika — there is probably no more accurate statement in teh entire investing world than this:

            “Each day that Apple closes lower increases the likelihood that the next trading session is green.”

  19. Wow. Thanks for the effort here. Much appreciated.

  20. “The probability isn’t gained from the sample size. It is derived from the fact that as you reach oversold conditions, each day that a stock becomes more oversold, the chance that it is nearing a bottom increases….”

    If the bottom includes delisting and bankruptcy – I will agree. But there is no rebound from that kind of bottom though…

    jozlika, save your ink. I fought this battle before.

    • And so you think there is actually a reasonable probability that Apple delists and declares bankruptcy? Because I’m referring to Apple very specifically here.

      • “Each day that APPLE closes lower increases the likelihood that the next trading sessions is green.” That is a very true and accurate statement. From a technical perspective, this is accurate for any stock that isn’t broken. And Apple isn’t a broken stock.

Leave a Reply