Trading Brief for Apple, Inc., that made $430 profit in 3 days

This briefing will examine the recently closed bearish perspective on the magnificent seven stocks and the tech giant Apple, Inc. This is a post-trade briefing sent to analyze the payoff profile and behavior of the asset for which an options instrument was used to exploit the move. The corresponding trade alert was sent to our member workspace.

Date: Jan 5, 2025

Market Focus: Equities & Options

Time Horizon: 7-day swing

Distribution Time: Post-Market

Market Overview (current)

• As we move past 2024, 2025 has started with notable momentum. This week, all three major indexes approached their mid-December lows before experiencing a strong rebound on Friday, which has renewed optimism among weary bulls. Although the market's recovery is still delicate, the end of the tax-loss selling period and the upcoming Trump inauguration in just a few weeks have sparked hopes that the bull market might regain its strength as the new year progresses.

• Tesla missed its delivery numbers as forecasted by the UBS, with 495,570 vehicles, narrowly missing the consensus estimate of 498,000 - 500,000; stock dropped about 5% on Thursday after the news and has recovered slightly. We still expect their revenue to be around $100 bn, but the annual profit will weaken since 2021. This is priced in as the stock has reflected this sentiment by staying in a consolidated range for the past few years amid a high interest rate environment, dampening the customer interest toward new EVs. The future looks promising and strong, however.

• Just over two years have passed since the October 2022 bear market lows. While significant indexes have improved significantly, history suggests this bull market may be just beginning. In the upcoming briefs, we'll analyze the major indexes' performance in 2024 across yearly, quarterly, and monthly timeframes.

• Looking specifically at the tech sector ETF, the QQQ delivered the highest percentage returns in 2024, climbing $109.78 per share to close the year at $511.23 (+27.05%). In contrast to the SPY, which faced challenges in the fourth quarter, the tech-focused index bounced back, achieving a remarkable +4.80% for the quarter. Although December was mainly stable, it ended positively, ensuring a notable nine months of growth for the year.

Foxconn reported stellar earnings, and it is Apple's leading supplier. We may see a gap-up opening for Apple on Monday, and our perspective has now shifted to bullish from last week's bearish move, which is now at a support level on the daily time frame with the moving averages stacked upright in a long trending up trend.

Apple is close to a $4 trillion market cap with a 35% YTD in 2024.

Without further delay, let us look at the technical analysis and the current position of Apple stock.

Technical Analysis

• Major Support/Resistance Levels for stock of Apple:

  • Support: 241, 236.5, 232.50

  • Resistance: 257.50, 260

• Indicators: (retrospection on trade alert date Dec 31)

  • Moving averages (e.g., 50-day, 100-day, 240-day)

  • MACD (Moving Average Convergence Divergence) signals sell

  • Bullish divergence on both daily and weekly charts between the price and MACD already manifested a few days ago and will continue forward into the upcoming earnings unless a conflict occurs later

  • Trend line breaks downwards after making resistance in the daily time frame acting on a receding volume from bulls (DTR yellow in the chart at bottom)

  • Stock was poised to move towards the Moving Average stack

  • No other conflicts on lower and higher time frames.

Rationale and Trade Explanation

How did we decide an entry in the first place?

Apple stock has surged since the election results a week earlier from around $219. This is an eight-week surge, and there should naturally be a profit booking.

We first confirmed this by drawing Fibonacci Extensions (look at the blue price labels as A, B & C points mentioned from the bottom of about ~ $196 (A), $237 (B) & $219 (C) They are also joined with a blue path line for your reference. Fibonacci extension is drawn by selecting a swing low (A) (or simply a low where you can see the price has bounced up) and joining that with the following high before retracement (B) towards another low (C) which is not so low, but still a higher low compared to (A) Once you join these three points, you can see the extension lines appear on the chart. They show the levels where the price can react. Most importantly, our focus is at 100% level, the key profit booking zone for the institutions and high volume traders.

100% level indicates the measured move from (C), which is similar to (A) to (B). Fibonacci extension tells the trader the potential exit levels for people who are trading the asset based on its past behavior (A), (B) & (C).

Let us examine the Fibonacci Extension levels to determine the stock's current status at the time of the entry (alert sent date Tuesday, December 31st).

Fibonacci Extensions - how to draw?

One can see the price started retracing back around the 100% level (ignore the red & green dots - they're coming from our IP algo script, but not helpful alone, rather good in confluence with other decision points)

You can take this and remember that the 100% level is typically where ample liquidity comes out into the order book to reverse the trend. This is also the same for bearish trends, where the shorts are squeezed upward. Fibonacci extension exits used here will work about 80% of the time; just don't be steadfast to draw perfect levels. Try different points and see which extension points make sense.

Once we determine a bearish stance, let us look at the chart at the time of the entry.

Before Trade Entry

Reasoning, as mentioned in the chart, focuses on key points:

1. The trend line shown in blue was broken after we identified Fib extension levels earlier

2. The yellow zone formed a near-term resistance for the upside (see the candle bearing the yellow zone resistance to understand why we drew and consider it a resistance (hint: buyers & sellers are at par)

3. Bearish divergence between the price and MACD indicator at the bottom shows a clear shift in momentum and that the bullishness is exhausted and now that the market may turn downwards

4. QQQ started the day along with other major stock market indices in the red, and overall sentiment for the market was bearish after months-long bullishness

This, therefore, was a good candidate to deploy a bear call spread where we selected the immediate resistance around 257.5 as our short leg for a call option, which we sold for a credit and bought a call option as insurance (protection) for the naked short at a strike of 260. This combination gives the trader a net credit immediately to his account with a negative cost basis, as the trader received a credit for selling this combination spread; this is accounted for a negative "-" cost, with an overall margin required by the broker at maximum the difference of the strikes minus (-) credit received. This is also the maximum loss should the trade go against the initial assumption, move upward, and expire the options in the money (ITM).

Here are the trade alerts sent out

Apple Bear Spread Alert

Order Filled for 10 contracts of Apple Bear Spread for a credit of $52 /contract

Here is the chart of the outcome: We closed the position with a $430 profit, a return of 22% in 3 days. It was a good trade.

Post-trade status

After breaking the trendline shown in blue, we can clearly see that the price raced towards the moving averages (MA) stack of lines pointing upwards. Price always has to come close to the MA stack, even after spending a considerable amount of time away from it. This happens all the time in a trending market.

Forward perspective

We think that the trend will continue, although it may not be decisive in January, before subsiding later, as the seasonality shows a strong surge in post-election results in the equity markets.

We expect the stock to rise on the recently announced strong Foxconn earnings reports. Foxconn is the leading supplier and manufacturer of the Apple iPhone, and we may expect a direct effect on Apple stock tomorrow when the market opens in the US.

Apple CEO Tim Cook also met with Trump multiple times. Tech giant leaders often meet with the incoming president to lobby for an environment conducive to their business growth in the new administration's first few years. No particular news-making event occurred, however.

Closing Notes Unlike the earlier briefs, which were primarily written in hedge-style institutional trading briefs (although shortened significantly), in the future, we will keep the topic of the brief trade-centric and extrapolate or illustrate the trade behavior pre-trade or post-trade, respectively. We found that delivering overall global sentiment for every brief is unnecessary for the retailers and increases the user reading time. If we intend to take any new trades on Apple in the future, they will be posted in a separate brief if necessary. Still, ideally, the current technicals will be carried out in the following months if the trend stays intact. Please note that the Fibonacci extension levels are dynamic. Feel free to experiment with different time frames and draw the ones where you can get the most accurate data by examining the charts and levels where the price seems to have reacted.