Apple (AAPL) stock has gained almost $200 since July’s low at $390. As the new Apple – China Mobile deal is expected to generate billions in revenue, all eyes will be set on Apple price action today. Shares are up $7 pre-market (not shown in chart).
But can we afford to make the trade?
The 6-month Apple uptrend
So Apple hit a low in July. That was not the first time though that Apple shares fell below $400 this year. They did so in April 2013. And if you have been studying the basics of technical analysis, that’s an entry right there due to the double bottom formation.
However, we were too busy to take notice back then. Bravo to all of you who bought Apple shares for less than $450. Are we newcomers still invited to the party?
Let’s go back to the daily chart and draw some lines. I’ll include the double bottom formation for reference.
No one doubts that Apple stock is trending upwards. The trend line (green arrow) will be our guide for any price action in the following weeks.
Also note how resistance has become support before. The confirmation of those levels took place with great accuracy, when Apple share price pulled back twice (3 and 4).
Regarding last week’s pullback, it’s also noteworthy that the level’s confirmation was done via a hammer candlestick. A hammer candlestick is usually considered a reversal formation following a downtrend. Although this time it’s printed during a pullback in the middle of an uptrend, it can still be used to bet that the market will resume trending up.
How to trade Apple during the China Mobile deal
Sure, we can consider the hammer candlestick a sign that sellers have lost power. Sure, that candlestick’s wick touched the previous resistance level. Sure, the trend line is valid still and we can follow the trend.
Yet, without confirmation we can’t really trade Apple stock, can we? The two candlesticks that printed after the hammer didn’t exceed the high or the low of that key candlestick. And till that happens, I can’t bet that the market will respect the reversal signals.
It’s now Monday and news has it that Apple’s revenue will likely increase significantly because of the deal with China Mobile Ltd, (CHL). News favors the uptrend. Alas, usually we sell the news and buy the rumors.
How come we are looking to buy the news on this one?
That’s because market often overreacts to news. And that creates an opportunity for quick profits (position traders, look elsewhere). Apple is already gaining in pre-market as mentioned above. Thus, it’s very likely today’s candlestick will confirm the reversal.
The bad news? The recent resistance level is too close!
Even worse, the overreaction of buyers will probably push the price away from the previous support level. And this is bad, because I’d use that support level for setting my stop loss. My exit strategy. Where I’d close my position, in case something bad happens, like someone cancelling the deal or iPhones suddenly seize operating around the world.
Say Apple opens at $548 and I am quick enough to buy some shares for that price (expecting a new higher high compared to the hammer candlestick). Setting the stop loss at $538 (lower than the hammer’s low) means I’m risking 10 bucks per share. Planning on buying 10 Apple shares, a decline to $538 will cost me $100.
Will I make the trade if my trading capital is $2,000?
I’d be risking 5% of my trading capital on a single trade. And that’s the best scenario, without taking into account the slippage or an unpredicted gap down.
Money management dictates I should risk up to 2% of my trading capital on any position. Therefore, I am either buying fewer shares or I don’t make the trade.
On the other hand, let’s assume that Apple opens at $558. Now I’d be risking $20 per share if I went long there. But that doesn’t worry me much. The problem is my profit target. And if I set that at the previous resistance ($575), I’m looking to make $17 per share. That’s even lower than a 1:1 risk/reward ratio.
Experts advise trades of 3:1 or better risk/reward ratio. And who am I to question them?
Before you pull the trigger on Apple, lean back and decide if you can afford the trade. If you do and have high hopes for Apple, you may join the ride. Yet, if like me you are going to trade out half of your position at the most recent resistance level, consider the risk/reward ratio and ask yourself: 'Is it worth it?'
What’s your trading strategy on Apple? Are you trading the news? Let me know in the comments below.