Join        Login             Stock Quote

Apple's Pending Breakdown Could Lead To Fast Profits In This Small Cap

 December 19, 2012 09:23 AM

(By Serge Berger) One way to put less money at risk to play Apple (Nasdaq: AAPL) is via its suppliers. When deciding which one, traders need to be selective and choose one with a decent positive correlation to Apple's stock price.

iPhone chip supplier Skyworks Solutions (Nasdaq: SWKS) is one such stock and my pick for playing Apple with more leverage. The stock has a beta of 1.46 versus the S&P 500, whereas Apple more or less is the market with a beta closer to 0.93.

[Related -Fusion-IO, Inc. (FIO): Can Fusion-IO Q2 Results Cheer Street?]

On the charts, the stock looks eerily similar to Apple and has reached or breached several key Fibonacci retracement levels that currently offer good risk/reward for a short-side trade for a 12% gain.

A simple look at the correlation between Skyworks (yellow line) and Apple (blue line) pretty much sums up all we need to know. Note, however, that the positive correlation hasn't always been this high. In 2011, for example, Skyworks rallied much more than Apple, before coming back down to earth toward the end of the year.

[Related -Google Inc (GOOG): Why Nest Labs Deal Is A Wakeup Call For Apple Inc.?]

From a longer-term perspective looking back to 2009, nothing hugely significant sticks out on the weekly chart, except maybe an oversimplified uptrend line that still lies below the market.

From the December 2011 lows to the September 2012 highs, Skyworks has failed at all the important Fibonacci retracement support lines, including what in my book is most often support of last resort -- the 61.8% retracement level.

Since early November, the stock has now dipped below the $20 mark on three separate occasions, each time followed by a bounce. Given what I see in the following charts, however, I expect the support level near $19.25 to ultimately fail.

Just as I measured the Fibonacci retracement move from the December 2011 to September 2012 swing on the previous chart, in the following chart I am measuring the move lower from the September 2012 highs to the November 2012 lows. 

On Dec. 6, Skyworks had retraced 38.2% (an important Fibonacci number) of said move, and again changed course to the downside, where it then retested the early November lows. The more often any given level of support/resistance gets tested, the more meaningful its eventual/potential failure to hold. 

In the case of Skyworks, the stock still looks very heavy and should, in time, have enough weight to push through the $19.25 support level. For a potential target in case support breaks, I again turn to the Fibonacci numbers. A 23.6% Fibonacci extension of the September to December swing lower gives us a price target near $16.30.

Since how this trade works out is largely dependent on Apple, the analysis would not be complete without looking at a chart of Apple.

Much like Skyworks, Apple retraced some of its September to November sell-off, but unlike Skyworks, Apple retraced to the more meaningful resistance level of 50%. This gives me more confidence that the stock's early December highs will hold as resistance and the key support level near $500 will eventually break. And by the way, should Apple break below the $500 support level, its downside target would be near $460, which is about 55 points lower than current levels.

Action to Take --> Short Skyworks at $20.50 or higher. Set stop-loss at $22. Set initial price target at $18 for a potential 12% gain in 4-5 weeks.

Serge Berger does not personally hold positions in any securities mentioned in this article. StreetAuthority LLC does not hold positions in any securities mentioned in this article.


Post Comment -- Login is required to post message
Alert for new comments:
Your email:
Your Website:

rss feed

Latest Stories

article imageBogle Says Indexing Destined To Win The Battle Of The Quants

Vanguard founder John Bogle gave a powerful speech last month at the Q Group’s Spring Seminar that lays out read on...

article imageVMAX and VMIN Poised to Be Most Important VIX ETP Launch in Years

REX Shares is launching two new VIX exchange-traded products on Tuesday in what is likely to be the most read on...

article imageThe April 29 Gold Triangle Breakout Update

If you’re just watching stocks, you may be missing this powerful Triangle Breakout surge in read on...

article imageSell In May, But It Is A Presidential Election Year

With May just around the corner, articles covering the "Sell in May' phenomenon are not in short supply and read on...

Popular Articles

Daily Sector Scan
Partner Center

Fundamental data is provided by Zacks Investment Research, and Commentary, news and Press Releases provided by YellowBrix and Quotemedia.
All information provided "as is" for informational purposes only, not intended for trading purposes or advice. iStockAnalyst.com is not an investment adviser and does not provide, endorse or review any information or data contained herein.
The blog articles are opinions by respective blogger. By using this site you are agreeing to terms and conditions posted on respective bloggers' website.
The postings/comments on the site may or may not be from reliable sources. Neither iStockAnalyst nor any of its independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. You are solely responsible for the investment decisions made by you and the consequences resulting therefrom. By accessing the iStockAnalyst.com site, you agree not to redistribute the information found therein.
The sector scan is based on 15-30 minutes delayed data. The Pattern scan is based on EOD data.