This is the latest edition of the Apple earnings preview. I have updated all charts and added two that have been missing from the series. You can see the results from the October, 2013 edition here: “Apple POST-Earnings Trading and Technical Review – October, 2013 Edition.”
Overall, there is a slight bearish bias but no slamdunk trading signal. Given I already own a few shares in AAPL, I am inclined to execute on the bearish signals. I am trying to get in on a Feb 535/525 put spread as a very conservative way to play the weak bearish signal. The spread eliminates much of the pre-earnings volatility premium but the spread still appears a bit “expensive” to me. The market must be bracing for the potential of a relatively large move (flashbacks from last January’s big gap down perhaps?). I went out to the monthly February spread given the weeklies through that monthly expiration are not much different in price.
If Apple beats the bearish bugaboo post-earnings, I can use the time until expiration for trading off the position. If AAPL soars post-earnings I will cover the short $525 put and use the $535 put as a (partial) hedge for the next month of trading on the Apple Trading Model (ATM). (I started writing this piece while AAPL was near its high of the day. As I finish the piece, AAPL has already faded all its gains. Ironically, this action is all very consistent with the ATM’s predictions for today! If my spread order does not as the close approaches, I may need to change the configuration.)
Here are the latest findings. My commentary and conclusions follow each chart. All price data from Yahoo Finance. Earnings dates are from briefing.com.
(Jan, 2007 to Oct, 2013)
Apple still has a historical edge in bullish post-earnings responses: 17 of the last 28 post-earnings responses have been positive. However, this advantage is fading: five of the last 6 earnings have featured negative post-earnings responses. That is a VERY bad trend even with Apple finally starting to recover from these multiple bashings. The biggest recovery of all was closing the post-earnings January, 2013 gap down – first on August, 19, 2013 and then a clean break through that resistance on October 21, 2013.
Only April and July deliver clear trading signals as far as the simple count of post-earnings upside trades. January and October are mixed with a marginal advantage to the bears.
Apple tended to trade up in the one week prior to earnings until 2012 (measured by calendar days – one of these days I will change this to trading days! I will also fix the down bars so that they are ALL red.)
The October, 2013 pre-earnings trading finally delivered upside for the two weeks leading into earnings. This was a headfake that was underlined by AAPL first trading up post-earnings and the fading hard. Fortunately, AAPL stabilized after that and head upward again in another four weeks.
Click image for larger view….
The biggest change in the correlation between pre-earnings trading and the 1-day post-earnings performance is in the 2-week performance. For 2013, the correlation almost entirely disappeared. Otherwise, AAPL’s post-earnings reaction tends to move inversely (opposite) to the pre-earnings trading whether it is the day of earnings, the 1-week or the 2-week performance.
Click image for larger view….
When grouped by earnings month, the pre to post-earnings correlations are not nearly as satisfying as the overall correlations shown above this chart. Only April delivers a strong signal and that is only for the 1-day pre to post-earnigns correlation.
Excluding today’s performance, AAPL is up 0.26% in the 1 week prior to earnings and up 0.25% in the 2 weeks prior to earnings. Maintaining a positive gain for today will marginally add to what is already a marginal bearish signal for AAPL’s post-earnings performance. My main hesitation comes from, of course, Carl Icahn piling into AAPL shares prior to earnings. The appearance is that he must know something or at least be extremely confident in his assessment. I hate to bet against Icahn on this trade, but I will stick with the numbers. If you decide to execute a pre-earnings trade on AAPL, PLEASE keep it conservative. There is no evidence here that it is worth the risk here to swing for the fences. AAPL should give plenty of good trading opportunities in the post-earnings wake.
Here is the chart as of the time of writing. Note how AAPL is pivoting around its 50-day moving average (DMA). If the post-earnings response does not resolve this pivot, we can look forward to more sideways action for weeks, maybe months to come.
Source: FreeStockCharts.com
Be careful out there!
Full disclosure: long AAPL shares
I am not sure when I will write the follow-up, so I am recording here that at the time of this note AAPL has plunged 7% in after hours following earnings. I am stunned. It turned out that this WAS a “homerun” type of post-earnings reaction. At least I managed to get the direction correct.