Apple (AAPL) keeps moving, from the stock that everyone hated in December to a stock that everyone loves again. The technical charts suggest the shares continue to rise and move higher toward $209 in the coming weeks. Additionally, options betting for the stock continues to be bullish.
On March 15 I noted that Apple’s stock was nearing a big break out and could rise to $195. Well, the stock is now at $195 and is breaking out again.
The technical chart shows that Apple is once again rising above a significant level of technical resistance – this time at $195. Shares have crossed that resistance level and now may be on their way to $209, where the next significant level of resistance awaits.
The equity is entering a region where trading volumes were very light as the stock fell sharply in the fall. That should provide very little resistance for the stock should it continue to rise.
The relative strength index (RSI) is still trending higher and is entering overbought territory. But it still indicates that the stock can continue to rise. However, should the stock rise to $209 an overbought RSI could mean the shares are setting up for a pullback, so one should watch how it performs closely.
The options for expiration on June 21 suggest the stock rises or falls about 9% from the $200 strike price using the long straddle strategy. It places the stock in a trading range between $182 and $218 by the middle of June. However, the open interest level for the calls far outweighs the puts, by a ratio of about 2 to 1, with almost 21,000 open call contracts to just 10,000 open put contracts. It would suggest that the stock price continues to rise.
A buyer of the $200 calls would need the stock’s price to rise to around $207 by expiration, a gain of about 6% over the coming weeks. The open interest levels have been steadily rising over the past six months
(Apple June 18 $200 Calls)
No Longer Cheap
If there’s one reason for caution, it’s that the stock is nearing a point where the valuation is getting lofty trading at about 14.7 times one-year forward earnings estimates. In the past, this region has been at the upper end of the range. It would suggest that the stock may be running out of room to rise.
However, should analyst estimates for next year begin to rise then that could help the multiple from expanding too far. Additionally, it isn’t clear yet if the market is in the process of revaluing Apple from a hardware maker of phones to a higher multiple consumer product- subscription service company. Investors typically give hardware companies cheaper earnings multiples because margins are tighter and the business is highly cyclical. However, service businesses typically trade with a higher earnings multiple because of the better margins and a more predictable revenue stream.
The path of least resistance for Apple still appears to be higher for now. Enjoy it while it lasts.
The focus of Reading the Markets is to find stocks that may rise or fall using fundamental, technical, and options market analysis. Additionally, we search for clues from the broader markets to discover trends and gauge direction.
Michael Kramer relies on his more than 20-year of experience working in the financial industry. 10-years of experience comes as an international and domestic buy-side equity trader at multi-billion long/short investment advisor.
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Disclosure: I am/we are long AAPL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Mott Capital Management, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future results. t