Investing is as much about financial numbers and understanding a company’s products, competitors and markets as it is about having a feeling for the non-quantifiable or psychological aspects to the stock. I use fundamental analysis much more than technical aspects when buying or selling a stock but I do believe the technicals or stock chart patterns can be very helpful when determining whether to execute a transaction on a short-term timeframe. (Note that I own
My transaction and plan
I have been using charts to help determine better entry points and to a degree exit points for buying and selling shares for over a decade. In mid and late February I sold my Apple shares at $126 and $129 when I thought that the stock had become overbought and should have a short-term correction. I had previously sold short-term, less than a month, $135 Call options against some shares to generate income since I thought the stock would at best stabilize at these levels and the options would provide some protection if the shares fell. I closed out the Call options when I sold the shares since I thought the shares could drop by a significant amount more than the Call option value.
I went into this transaction with the intent of buying back the shares if the stock behaved the way I thought it could. However I kept a close eye on it and would have been willing to get back in above where I sold if there was enough information to change the fundamental analysis or if the chart pattern didn’t play out as I thought it should. My short-term target was around $120 when looking at how previous patterns had played out but I was not rigid on this price since it would be data dependent to borrow a Federal Reserve term.
How I use charts
When looking at the chart below Apple’s shares RSI or Relative Strength Index (the top section) crossed 70 (overbought territory) on the way up when I first sold and dropped below it on my second sale. While I didn’t hit the highest few days the peak lasted about a week.
The bottom section of the chart is the MACD or Moving Average Convergence Divergence. It can indicate overbought or oversold situations and was also at a three year high in February with a reading above 15. You can also see that the shares had gotten significantly above its 50 day moving average.
I decided to buy back the shares in mid-March when the shares RSI had crossed below 50, a neutral reading on overbought or oversold, along with the MACD almost getting to neutral. After Apple’s Watch announcement it seemed like the stock had formed a bottom even if it was only for a few days so combined with the RSI and MACD readings I bought back in at $124. While the shares had not touched its 50 day moving average as it had done numerous times before it seemed prudent to take my “winnings” or loss avoidance and get back in since Apple’s fundamentals are still very good.
Apple’s fundamentals look very positive
Most of Apple’s fundamentals look very good. These are led by the iPhone 6 and 6 Plus’s very strong demand with their higher average selling prices (ASPs) and gross margins. While it will run into tough comparisons in the December 2015 quarter with its premium position and cash generation Apple is in a very solid financial situation.
While the iPad has experienced four quarters of declining year over year sales it still generated over $30 billion in revenue in fiscal 2014 and is the leading tablet on the market. The Mac continues to gain share in the PC market and increased its revenue by 12% in fiscal 2014 to $24 billion.
The stock also trades at a very reasonable 14.7x PE multiple on fiscal 2015 Street estimates (which may be too low but due to Apple’s size may not reach a market multiple) and does not take into account its $12.60 in net cash per share when international taxes and cash needed to run the business are taken into account. While the company may not be as aggressive with stock buybacks unless it decides to take on a large amount of debt it does have the balance sheet to do so if it wishes.
While it remains to be seen how well Apple’s new Watch will do after the initial surge of buyers it is an indication that innovation is still alive and well at Apple. Apple Pay could very well have a bigger impact on Apple’s profitability long-term and I wouldn’t hold my breadth on a full blown Apple car seeing the light of day. My leaning is that Apple is working on the car’s “interface” much like it has done with other products and exploring the connected car ecosystem. It is much more likely that the company will pull something off in the TV market (my leaning again would be the interface or working with content providers, not an actual TV set) since it has been hinted by Steve Jobs and now Tim Cook for a number of years.
