Share It

Share |

Monday, August 13, 2012

AAPL: A Possible Short Trade?

Apple (AAPL) is currently on the high end of investors' line of attraction. A picture of Marketwatch's overview of the company is pretty clear: 


Almost everyone is more or less bulish on the stock. While I do admit this fuels growth of the stock price, this is not a sustainable condition. Such an overly bullish sentiment may come as a huge warning sign from a contrarian perspective.

Since the beginning of 2012 the stock's price experienced an interesting move. After going rapidly to about $640 it fell with almost $100 down to $540 level for about a month. Since the second half of May 2012 it is again on the rise and now trying to reach its previous high. 

What seems like a hope-fueling mode although, could prove to be nothing more than a normal reaction of a correction when all the people who have left the previous uptrend are getting on the train with renewed hopes. Hence this could be a false move given the newcommers are not strong enough to sustain the demand in near- to long-term perspective. It has happened before, in all kinds of markets and shares and since it's connected with human behavior, this type of market movements will continue to happen.

Let's look at the charts and some sentiment tools.

This is the daily chart of AAPL. What's noticeable here is the lower volume the recent upward movement relies on. This is especially true for the price increase since the dividend day. On theory a lower volume combined with a price increase speaks of exhausted buyers. This is a technical warning sign. The stock might still see some upward movement close to the previous high at $640 but the low volume suggest  there would not be enough demand to go much farther.

Schaeffer's Research website gives an insight on the option players' mood concerning AAPL. Put/Call open interest ratio is close to the highest value in one year so this suggest prevailing pessimism toward the stock. Viewed as a contrarian indicator this would suggest a further increase in the AAPL stock price might be possible because of an overly pessimistic mood.  Such a mood however might be present only inside the option players because of the price reaching the previous high and seems to not be supported by neither the analysts recommendations, nor the general market participants as shown by the picture in the beginning of this article.

The short interest on the stock however has been falling since the second half of June 2012 which would partly explain the increase in price experienced since then. What that falling short interest would suggest is that there would be a smaller possibility for a price increase due to short covering.

The open interest configuration shows there is a concentration of put options around the $640-670 level which could serve as a resistance. The calls are concentrated in the $500-640 range.

With all those remarks a further strong increase of the Apple's stock price like the one we witnessed till the April 2012 could not be so probable in near term. 

In any case a suitable stop loss order would limit the possible loss on either side of the trade.

No comments: