Dow component Apple Inc. (AAPL) is trading higher by about 2% in Thursday's pre-market session after beating fiscal fourth quarter profit and revenue estimates by healthy margins. The tech icon reported earnings per share (EPS) of $3.03, well above the consensus of $2.83, while revenues of $64.04 billion beat estimates by $1.20 billion. Even so, revenues rose just 1.8% year over year, highlighting maturing business operations bolstered by new income streams.

iPhone revenues fell 9%, but analysts expect new versions and price points to improve sales in coming quarters. Wearable items grew at an aggressive pace, gaining 54% year over year to $6.5 billion. Rock-solid American sales growth of 7% cancelled out contraction in China, where sales fell another 2% to $11.1 billion. Look for slumping sales in this venue to continue until the United States cuts a trade deal. The company raised first quarter guidance from $86.21 billion to a range between $85.5 billion and $89.5 billion while expecting gross margins to stay around 38% for the quarter and fiscal year.

Cowen raised its price target from $250 to $290 in a Thursday morning note, excited that iPhone and services booked stronger-than-expected revenues for the quarter. The analyst firm is especially optimistic about the low-cost iPhone SE2 set for release in the first half of 2020 and also looks forward to the 5G roll-out later that year. It's instructive to note that analysts' desks are quieter than usual following an Apple release, potentially indicating a consensus that the stock is fully valued.

The post-news reaction briefly mounted Tuesday's all-time high at $249.75 and pulled back toward $246, establishing a line in the sand for the regular session. The stock is overbought after gaining more than 30 points in October and breaking out above the 2018 high, raising doubts about a follow-through rally after last night's metrics. A negative tone in Thursday's session could also undermine that effort, but it's hard to bet against the company given the outstanding quarterly performance.

AAPL Short-Term Chart (2017 – 2019)

Chart showing the share price performance of Apple Inc. (AAPL)
TradingView.Com 

The stock broke out above seven-month resistance near $195 in May 2018 and took off in a powerful trend wave that reached $233 in October. It sold off more than 90 points into early January and turned higher in a recovery wave that carved an uptick into $215 in May. A higher June low attracted committed buyers, but the subsequent rally failed to mount the prior high. A third attempt in September did the trick, setting the stage for a breakout above the 2018 high in mid-October.

Price action since the October low has carved a small-scale Elliott five-wave rally pattern, suggesting an intermediate top near $250. The theory is getting tested in Thursday's session, with a buying spike above that level setting the stage for additional gains. On the flip side, selling pressure could pick up steam after a reversal, dropping into a test of breakout support above $230, with that level offering a low-risk buying opportunity.

The on-balance volume (OBV) accumulation-distribution indicator warns of elevated risk because the October rally has failed to attract the buying power needed to lift into or above the September 2018 and April 2019 peaks. This bearish divergence predicts an eventual downturn that tests new support and the rising 50-day exponential moving average (EMA). Taken together with the Elliot pattern, sidelined investors may wish to keep their powder dry until resistance at $250 is mounted successfully.

The Bottom Line

Apple has beaten fourth quarter earnings and revenue estimates, reporting slumping iPhone sales but solid results in other divisions. The stock is over-bought after a strong rally and breakout, telling market players to follow price action near $250 because a reversal is possible.

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