Apple Inc. (AAPL) reported second quarter earnings after the closing bell on Tuesday, July 30, and beat analysts' estimates. The stock opened Wednesday, July 31, at $216.42 and continued higher. My call is to reduce holdings on strength to Apple's third quarter risky level at $221.65.

Despite its 13th consecutive beat on earnings per share (EPS) estimates, sales of iPhones continue to decline. Since there are 900 million users of Apple smartphones, there's a solid base for other products such as music, videos, and gaming. Wearables are also gaining traction, with the Apple Watch and AirPods showing strength. In addition, demand for iPhones should rise again as soon 5G versions are available.

Shares of Apple closed Tuesday, July 30, at $208.78, up 32.4% year to date and in bull market territory at 47.1% above the Jan. 3 low of $142.00. The all-time intraday high of $233.67 was set on Oct. 3, so the stock is now rising out of correction territory, as it had been 10.6% below the high. In the longer term, Apple is consolidating a bear market decline of 39% from its all-time intraday high of $233.47 set on Oct. 3 to its Jan. 3 low of $142.00. Apple stock is reasonably priced with a P/E ratio of 17.47 and a dividend yield of 1.48%, according to Macrotrends.

The daily chart for Apple

Daily chart showing the share price performance of Apple Inc. (AAPL)
Refinitiv XENITH

The daily chart for Apple shows that the stock has been above a "golden cross" since May 8, when the 50-day simple moving average rose above the 200-day simple moving average to indicate that higher prices lie ahead. Even so, the stock slipped to a test of its annual pivot at $182.85, which was a buying opportunity.

The close of $197.92 on June 28 was an important input to my proprietary analytics and resulted in the following key levels. Apple's semiannual value level for the second half is at $178.71, with a third quarter risky level at $221.65, which is below the all-time high. A new monthly level will be available based upon today's close.

The weekly chart for Apple

Weekly chart showing the share price performance of Apple Inc. (AAPL)
Refinitiv XENITH

The weekly chart for Apple is positive, with the stock above its five-week modified moving average of $203.80. The stock is well above its 200-week simple moving average, or "reversion to the mean" at $151.65. Note how Apple stock stayed just above its "reversion to the mean" during the week of Jan. 4, when the average was $141.85 versus the low of $142.00.

The 12 x 3 x 3 weekly slow stochastic reading is projected to end this week rising to 75.93, up from 69.48 on July 26. At the May 1 high, this reading was 92.53, above the 90.00 threshold making the stock an “"inflating parabolic bubble," which popped during the 20% decline into June 3. As 2019 began, this reading was 7.54, well below 10.00, which is my indication that the stock was "too cheap to ignore."

Trading strategy: Buy Apple shares on weakness to the annual and semiannual pivots at $182.85 and $178.71, respectively, and reduce holdings on strength to the quarterly risky level at $221.65.

How to use my value levels and risky levels: Value levels and risky levels are based upon the last nine weekly, monthly, quarterly, semiannual, and annual closes. The first set of levels was based upon the closes on Dec. 31. The original annual level remains in play. The weekly level changes each week. The monthly level was changed at the end of each month, most recently on June 28. The quarterly level was also changed at the end of June.

My theory is that nine years of volatility between closes are enough to assume that all possible bullish or bearish events for the stock are factored in. To capture share price volatility, investors should buy shares on weakness to a value level and reduce holdings on strength to a risky level. A pivot is a value level or risky level that was violated within its time horizon. Pivots act as magnets that have a high probability of being tested again before their time horizon expires.

How to use 12 x 3 x 3 weekly slow stochastic readings: My choice of using 12 x 3 x 3 weekly slow stochastic readings was based upon backtesting many methods of reading share-price momentum with the objective of finding the combination that resulted in the fewest false signals. I did this following the stock market crash of 1987, so I have been happy with the results for more than 30 years.

The stochastic reading covers the last 12 weeks of highs, lows, and closes for the stock. There is a raw calculation of the differences between the highest high and lowest low versus the closes. These levels are modified to a fast reading and a slow reading, and I found that the slow reading worked the best.

The stochastic reading scales between 00.00 and 100.00, with readings above 80.00 considered overbought and readings below 20.00 considered oversold. Recently, I noted that stocks tend to peak and decline 10% to 20% and more shortly after a reading rises above 90.00, so I call that an "inflating parabolic bubble," as a bubble always pops. I also refer to a reading below 10.00 as "too cheap to ignore."

Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.