A Brief Technical Analysis Of AAPL: Time To Average Down?
October 4th, 1999 

Let's just cut straight to the chase. What every Apple investor, and potential investor, wants to know right now is what the heck is going on with the stock price!

Especially the silly ones, like myself, who rushed in to buy in the low $70's because we couldn't believe our good fortune when Apple opened down $7 on Tuesday, September 21. A few days later I was crying in my micro-brew at the local pub as Apple slipped down, down, down into that burning ring-o'-fire. I knew better to buy only days after a serious haircut. As a rule of thumb, always wait for ALL the news to come out, and for the massive volume churn to abate before going bottom fishing. Oracle's (ORCL) faux pas earlier this year, and subsequent recovery, is a classic example of how Apple's Q1 2000 chart may look.

I hope you kept the Jedi faith and held on to those paper losses because Apple is going to come back. Duh. Still, money lying dead is a pain in my trader's backside, so I averaged down. I knew to buy on that $58 100 day exponential moving average, but didn't get in, due to my own personal cowardice, till the short term MACD began turning around. I got in at $60 1/2 on Thursday.

Hey, you say, my bible, "Investing 101 for Dummies", says never to average down. OK, that's generally good advice. Nevertheless, like every other rule in investing there are exceptions. Apple's Q1 2000 is likely to be the best quarter in the history of the company. If it helps, don't look at it as averaging down, it's merely a buying opportunity. This is a good quarter to be overloaded with Apple. Of course, you should bring a proper balance back to your portfolio in a hundred days or so. By then, AAPL should be setting new highs.

Everyone loves to sagely quip, "The market is never wrong." Yeah, right. I understand that you should never fight market trends, and that the minute by minute stock price is a precarious balance between buyers and sellers that represents a type of empirical reality. That said, if the market was never wrong, then there would never be buying or selling opportunities because the market would never over or under shoot the value of an equity. @home would never have reached $198, IBM would never have dipped to $14 in 1993 and Apple would not have corrected to $58 last week. Apple is a screaming buy at these levels. The market is wrong, fer crissakes!

Why this missed earnings is not as serious as it might seem.

The haircut AAPL received due to the 30% surprise drop in earnings for Q4 is hardly surprising, but the reason for the lower earnings is. Usually a company misses an estimate because they couldn't sell enough product. This usually brings on collateral damage -- backed up and depreciating inventory, over capacity on the factory floor, overstaffing, lower worker productivity and increased marketing expenses. These elements form a negative feedback loop on future earnings, which is why The Street regularly beats the snot out of those that stumble.

Apple's error doesn't fit into this category, but myopic investors are handing out the same punishment. Some of last week's depression was due to status conscious fund managers who didn't want Apple on the books for their end of quarter reports after the recent tumble. Those same managers will buy back in for the same reason in the next few days. To add to this pain is the fact that many investors seem to be looking for any excuse to take profits lately. Not to mention the Taiwan tragedy and the general market malaise we are experiencing. Apple fiercely over sold.

The ultimate reason that Apple couldn't sell enough product this quarter is that the demand exceeded Apple's ability to ramp up production of the goods. There is no collateral damage to future earnings, in fact, the opposite effect is likely. The graphic professionals and high-end geeks will wait in line for their G4s, along with the Mac faithful. There are no clone vendors to mop up the impatient. The only competition a G4 really has is NT, and the gulf between the two is so great, few potential G4 buyers will cross over. However, many from the Dark Side may jump the gulf to the G4!

The brilliant iBook is at least a year ahead of any possible PC competition. That's how long it took the PC beige box vendors to crack the arcane calculus of the iMac's success. Apparently there aren't many Einsteins working at Dell or Gateway, and Compaq is positively Cro Magnon. So what's the sweat? No one has yet brought to market any serious threats to the iMac. A few weeks delay here, while unfortunate, doesn't fundamentally change a thing.

Ever wonder why those cool Apple TV commercials are so few and far between, while at every other commercial-break you have to listen to the insidious Intel jingle and Magic Bus? There is no reason to advertise if demand already exceeds supply.

The G4 shortage is a problem. But it is a problem that every CEO would wish to be their main challenge --how to ramp up production fast enough to meet overwhelming and unexpected demand. Life's tough.

A brief technical analysis of AAPL.

AAPL has defined the lower limits of its new trading range at $58. On four different occasions, AAPL tested $58 and found it to be rock solid support. At $58 we find the 100 day exponential moving average, which might not mean anything by itself except in AAPL's case it has been the source of solid support during Apple's last two dips in May and June. Those mini-downtrends were caused by negative news, and subsequent false perceptions about Apple's potential growth, just like this not-so-mini downtrend. $58 is also a support level established back in August. Check it out yourself.

Other good technical indications for Apple include the rapid conclusion to the negative trendline that started on September 21st, and the beginning of a new up trend last Thursday. Volume has begun to return towards normal levels indicating the churn is over and accumulation by Alex Brown clients (the buy low, sell high crowd) has begun. The price for option calls at $60 for the month of January has almost doubled in the last couple of days. That's a sign that the most savvy of traders believe Apple will be in the $70 to $90 range by then.

How to breathe underwater.

I've decided that I'm going to trade my way out of this mess. You see, now that Apple has declined in a stair step pattern over the last 9 days, it has left a number of disenchanted investors underwater in its wake. The climb back to $80 and beyond will look nothing like the first ascent.

For instance, let's just say that you bought a block at $63 after consulting your astrologer and sacrificing a chicken. Two days later AAPL downtrends further, not finding support till--the now painfully obvious level in hindsight-- $58. You are one pissed off investor. Pissed at yourself for not seeing that extra 5 point decline coming, pissed at Apple for being such a lousy investment. So, what do you do? You moan, " I just hope I can get my investment back out of this money pit. Shoulda bought MSFT!" Ok, so you wouldn't buy MSFT if it was the last stock on earth, but you get the idea. You'll feel lucky just to get your money back.

Voila! That's the psychology of resistance. Resistance is even more predictable in today's market because the newbie online investors and TA dogs, like myself, tend to reinforce the concept beyond its original implications. That's why AAPL, on Thursday, went up intraday to $64, but dipped as low as $60 on Friday. That's why AAPL's climb back to the $80 level is going to be haunted by many little uptrends that sell off as we faithful accumulators flush out all the visionless investors stranded underwater till their porcine noses finally suck air. Of course, AAPL is heavy with institutional investors who can often confound any analysis of support/resistance levels by the shear size of their trades, so some resistance levels will shatter quickly to rapid uptrending gaps. While others will hold fast for weeks.

In conclusion to this long-winded expose of market psychology, I intend to average down a hundred shares to hold long, and then buy another block to trade my way back up, buying on support and selling on resistance using limit orders all the way back to $80 and beyond.

The potential for upside surprise announcements from Apple in the next few months is great. 

Your comments are welcomed.