Apple No Longer Rotten

At the end of last month, I wrote that AAPL continued to be a stock to avoid and if anything should be treated as a trading vehicle. I discussed several reasons for this belief, but also wrote "that's not to say AAPL is bereft of any encouraging signs" and went on to list a few bullish indications.

Month to date through yesterday's close, AAPL has returned 11.9% versus the S&P 500's decline of -1.5%, a very strong short-term move. One of the reasons I remained negative on the stock was that momentum for AAPL continued to be muted or constrained, with any rallies being anemic and lacking significant thrust. 

Well, all of that changed in a heartbeat over the last few weeks. Typically when a stock is suffering from below-average momentum, it takes some time to evolve out of this subdued condition, with stronger momentum eventually coming after a period of gradual improvement. However, there are times when a stock can explode out of what was a mired state, doing so abruptly and with tremendous force. That appears to be what's happened for AAPL and, in my experience, is quite a bullish indication.

Source: Stockcharts.com

The daily chart above shows AAPL breaking out at the end of last month, successfully getting through the neckline of an inverse head-and-shoulders pattern. Earlier this month, the stock broke out again on high volume. Note in the upper inset that the relative return of AAPL likewise broke through a declining trend line at the end of July -- overall, a very nice chart.

Granted, this recent move has price very extended and you can see in the chart that resistance exists in the 500-550 range due to price congestion at these levels during late last year. It wouldn't be surprising to see AAPL pause here and consolidate, or even retrace some of these gains. Assuming it occurs in orderly fashion, I would consider such action normal and even bullish as the stock is then able to reenergize for another move higher. Note also that given the huge fanfare surrounding AAPL, if such a retreat were to occur it would attract the attention of many investors looking to make an opportunistic entry into this once high-flyer -- further providing support or a floor for the stock price.

I would also mention that with this recent move, money flow has turned positive.

Source: Bloomberg

The chart above shows the break out in money flow, turning up earlier this month, inferring underlying accumulation of the stock.

I believe AAPL has finally turned the corner and should do well in the near future. With this apparent change in the stock's bias, some important lessons can be gleaned. I was bearish on the stock -- now I'm bullish. The evidence dictated a change was in order. Always try to stay objective and process-driven. Never get seduced into believing a stock should do this or that based on prior beliefs. Such beliefs are just that, things of the past, and should be updated when new info presents itself. I could go on and on with other behavioral finance investing tenets that apply here (never get wedded to a stock or a company's story, stocks are to be rented not owned, avoid becoming overconfident, etc.), but you get the point. It's not easy, but then that's why it generally works.