(By Rich Bieglmeier) Apple (AAPL) fell to the floor on Wednesday and got all bruised up. In the past, investors have overlooked the dark spots and ate at the Apple for the rebound. The question is will Wall Street act like kids, see the bruises and say ew, that's gross and put the smartphone down? Or will they buy the dip?
Let's examine a few technical scenarios, but before we do, here are the two most reasonable explanations for Wednesday's mud slide. A DigiTimes article projected a sharp drop in component orders by AAPL, which hints at lower than expected demand, and concerns that Apple might lose out in sales to Nokia (NOK) in China. Maybe our NOK obit was premature? Nah.
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The downbeat news items drove shares down $37.05 (6.43%) during the day and set the internet a blaze as AAPL is closing in on the "death cross." Oh, so scary. FYI, the "death cross" is when the 50-day average crosses below the 200-day average. According to research iStock has read, it might as well be called the "it means nothing cross" as it roughly has a 50/50 track record.
Instead, we like to look at support and resistance levels, along with volume. iStock also searches for reliable patterns that lead to potential pivot points. First up, AAPL appears headed to support at $525. There is very little, if any, resistance between here and there. A firewall at $525 is the key point for a couple of reasons. First, it's a triple point of support. The stock pivoted higher at $525 in early March, mid-April and again in the middle of November.
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Secondly, if Apple shares close 2%-3% below $525, it would establish a pattern of lower lows following a lower high, now that's usually deadly, in the short-term anyway. It's the absolute definition of a downtrend. Since the tech giant went vertical to start 2012, it could go free fall to end 2012. After $525, the next layer of support is at $500. For some reason, traders like round milestone numbers; it's odd, but it is real. After $500, it is an elevator ride straight to $450, and then things begin to clump up at $425. It's really clear on the 10-year weekly chart.
Piper Jaffray Technical Analyst Craig Johnson, told Barron's, "we believe that for this technical indication [50/200 death cross], most of the damage has been done to AAPL, but there could be a worst case additional 10% move to the downside which could be the next meaningful area of support."
iStock tends to agree with Johnson with one exception. If the APPL closes below $520, nearly another $100 of damage is likely coming, with, minus some crisis, $425 (20%) as our worst-case scenario.
So, if you are like every money manager out there and own Apple, how do you play it? We think investors would be wise to see what happens at $525. If triple support breaks and a fresh low is put in place, iStock puts it at 20% the slide ends at $500, 80% it ends at $450, and 95% it ends at $425. Like we said a few sentences back, we think it will take some form of major, economic meltdown for AAPL to move below four and a quarter bills.
With our technical targets in mind, owners of Apple stock might consider buying February, 2013 $500 puts if the stock closes in the neighborhood of $520. You'll feel better and look mighty nice in those shorts if/when the stock trades down to $450ish.