Apple Inc. (AAPL) stock rallied within four points of September's all-time high on Tuesday, raising hopes for a year-end breakout lifting the Dow component toward $150. Optimism about the tech icon's "secret" plans to develop a self-driving automobile drove the rally, but revenue from that endeavor won't come online for several years at a minimum. As a result, Santa Claus looks like the real explanation, with that bullish seasonality coming online this week.

Key Takeaways

  • Apple posted an all-time high in September and entered an intermediate correction.
  • The stock has corrected through time rather than price in the past four months.
  • Price action is now testing the all-time high.
  • Breakout timing is uncertain due to the flip side of the January Effect.

The stock entered a trading range just two days after Aug. 31's four-for-one stock split and has been working off extremely overbought technical readings through time rather than price. The pattern has posted three higher lows during this period, carving a picture-perfect consolidation that has triggered little or no profit-taking. Even so, seasonality will turn bearish in less than two weeks, with the possibility of capital gains selling pressure limiting the upside.

Apple has posted a phenomenal 79% year-to-date return, making it a prime candidate for a January selloff. In theory at least, investors hold onto their biggest winners through year end to defer capital gains liability into the new tax year. The subsequent decline can be intense but short-lived, with freed-up cash rotating into new plays. This phenomenon, known as the January Effect, doesn't happen every year, so we'll just have to wait and find out what 2021 has in store.

Wall Street consensus on Apple stock has deteriorated since the second quarter, with historic share price gains lowering expectations. Apple is now rated as a "Moderate Buy" based upon 23 "Buy," 6 "Hold," and 1 "Sell" recommendation. Price targets currently range from a low of just $75 to a Street-high $160, while the stock is set to open Wednesday's session just above the median $132 target. It could easily post a new high heading into year end with this supportive placement.

A Santa Claus rally describes a sustained increase in the stock market that occurs in the last week of December through the first two trading days in January. There are numerous explanations for the causes of a Santa Claus rally including tax considerations, a general feeling of optimism and happiness on Wall Street, and the investing of holiday bonuses.

Apple Daily Chart (2018 – 2020)

Chart showing the share price performance of (AAPL)
TradingView.com

A powerful uptrend topped out at a split-adjusted $58.37 in October 2018, giving way to a steep decline that found support at a 52-week low in December. Price action completed a round trip into the prior peak in October 2019, yielding an immediate breakout that reached the low $80s in February 2020. The stock sold off nearly 30 points into March, testing breakout support, and completed a 100% retracement into the first quarter high in June.

The subsequent breakout attracted momentum buyers, lifting Apple more than 50 points into September's all-time high at $137.98. It fell more than 25% in the next three weeks, shaking out weak-handed buyers who bought the split, hoping for easy profits. Price action has now been stuck between that high and low for more than three months while the on-balance volume (OBV) accumulation-distribution indicator grinds sideways, showing little or no selling pressure.

This is a great set-up for a breakout and uptrend, but timing is uncertain because the monthly stochastic oscillator is still flashing a sell cycle, indicating that additional price development may be needed for sustained upside. Taken together with the flip of the calendar into January, investors may wish to tread lightly to avoid buying too close to range resistance, which could trigger a reversal at any time.

Seasonality is a characteristic of a time series in which the data experiences regular and predictable changes that recur every calendar year. Any predictable fluctuation or pattern that recurs or repeats over a one-year period is said to be seasonal.

The Bottom Line

Apple stock is testing September resistance and could break out in coming weeks.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.