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No sooner had 2023 begun than Apple (AAPL) went on an almighty tear.
Within a month, the world’s largest stock had rallied around 27%.Then, after a brief pullback in February, AAPL rallied again.
By early June, AAPL had erased all its losses from 2022. And it was trading at all-time highs by July.
Like other tech stocks, investors have bid up AAPL on the huge potential AI has for its products and services.
And like we saw with Adobe (ADBE) last week, AI will further embed market leaders like AAPL in their already dominant positions.
Yet as we saw at the start of August, AAPL isn’t immune to mixed earnings…
Looking for a Reason to Sell
AAPL’s Q3 earnings per share (EPS) beat analysts’ forecasts. But a slight drop in revenue from lower iPhone, Mac, and iPad sales gave stockholders an excuse to sell after such a massive run-up.
AAPL had been on the verge of breaking through the $200 level. But the news saw AAPL instead gap down. It soon was trading below $180.
That move put AAPL in oversold territory, though. And the ongoing excessive pessimism about China’s slowing economy had been fully priced in. So AAPL looked set for a potential bounce.
Remember that we’re trying to capture reversions to the mean (not long-term trends) after a stock has overshot in either direction.
So we took advantage of this setup to generate a tidy 35.9% profit for members of my options advisory, The Opportunistic Trader – a strong result in just five days (including a weekend).
The Right Trade Setup
In the chart of AAPL below, you can see its steady climb up to its July peak.
Throughout this period, the 10-day moving average (MA, red line) bullishly moved above the 50-day MA (blue line).
And the Relative Strength Index (RSI) tracked along the overbought level (upper grey dashed line). That’s a common pattern in a strongly rising stock.
Apple (AAPL)
Source: e-Signal
Yet even before AAPL’s mixed earnings, the RSI was already starting to show declining momentum from overbought territory(red line).
Its share price started to soften as AAPL ran into its earnings date.
AAPL’s earnings added further weight to its struggle to maintain its high level of momentum.
That short, sharp sell-off from its July highs saw AAPL lose around 10% in a week. It also saw the RSI cross down from overbought to oversold territory (lower grey dashed line), as you can see on the chart.
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Holding Support
The RSI held support (lower orange line), so any uptick in momentum would halt AAPL’s slide (upper orange line) and also provide a base for AAPL to rally.
So, on August 17, we took out a long position in AAPL by buying a call option. A call option increases in value when a share price rallies.
Although AAPL opened the next day lower, it soon started to gain, closing the day higher than the previous close.
And after the weekend, it continued with its climb.
Take another look:
Apple (AAPL)
Source: e-Signal
Momentum started to wane the following day (Tuesday). And our position was already in good profit. So we closed out our AAPL trade by selling our call option on August 22 for around a 36% gain.
To be clear, we generated this level of profit by using options. Had we just bought the shares, our profits would have been smaller.
Yet this trade highlights that we don’t have to capture big moves in the underlying stock to generate an outsized return.
Instead, we need to look for stocks that have moved too far in either direction. We then aim to profit when that stock reverts the other way.
It also shows that despite any hype (such as AI), the market ultimately judges based on what a company earns.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict