Apple Will Likely Test Its 'Reversion to the Mean' in 2019

Apple Inc. (AAPL) stock set its 2018 low on Friday, Dec. 21, when it dipped to $149.63. The stock ended last week at $150.73, down 10.9% year to date and solidly in bear market territory at 35.4% below its all-time intraday high of $233.47 on Oct. 3. Driving the stock higher during the first three quarters of the year were solid earnings reports on May 1 and July 31. Between Feb. 2 and May 1, investors had the opportunity to buy the stock at its 200-day simple moving average as it rose from $159.54 to $166.19.

What turned the stock lower on a dime? Federal Reserve policy has been a warning for stocks all year long. As October began, the Fed began to unwind its balance sheet by a staggering $50 billion per month.

There were chart warnings too. Apple shares began to be an "inflating parabolic bubble" during the week of Aug. 24, which lasted through the week of Sept. 14. This was a reason to reduce holdings on strength to risky levels. As October began, I had a quarterly risky level at $227.22 as the level at which to reduce holdings.

I use 12 x 3 x 3 weekly slow stochastic readings for my measure of momentum, which is shown along the bottom of the weekly chart below. Stochastic measures scale between 00.00 and 100.00, where readings above 80.00 are overbought and readings below 20.00 are oversold. When the stocastic readig is above 90.00, I call it an "inflating parabolic bubble." When it is under 10.00, I call the stock "too cheap to ignore."

The downside for Apple accelerated following its earnings report released on Nov. 1. The tech giant beat estimates on earnings per share, but there was a concern about iPhone demand for the holidays. The fact that Apple will no longer offer a bean count on iPhone model sales spooked investors.

The daily chart for Apple

Daily technical chart showing the performance of Apple Inc. (AAPL) stock
MetaStock Xenith

The daily chart for Apple shows four horizontal lines. At the top are my monthly and quarterly risky levels at $222.65 and $227.22, respectively, which are below the all-time high. In the middle are two lines that are my semiannual and annual pivots at $181.73 and $176.57, respectively, which were magnets between Nov. 20 and Dec. 4.

As the stock was trading below these levels to the low of $149.63 on Friday, a "death cross" formed! A "death cross" occurs when the 50-day simple moving average falls below the 200-day simple moving and indicates that lower prices lie ahead. This makes it tough for Apple stock to rebound to $187.00, which would take shares out of bear market territory.

The weekly chart for Apple

Weekly technical chart showing the performance of Apple Inc. (AAPL) stock
MetaStock Xenith

The weekly chart for Apple is negative but oversold, with the stock below its five-week modified moving average of $179.34. The stock is above its 200-week simple moving average, which is the "reversion to the mean," at $141.61, where the stock should be bought. The chart clearly shows that buying at the "reversion to the mean" was a huge successful buy on weakness strategy between the weeks of May 6, 2016, and July 1, 2016, when the average was around $93.30. The 12 x 3 x 3 weekly slow stochastic reading ended last week at 9.03, down from 12.80 on Dec. 14. This reading is well below the oversold threshold of 20.00 and has fallen below 10.00, becoming "too cheap to ignore."

Investors who wish to add to long positions should buy Apple stock on weakness to its 200-week simple moving average at $141.61. Sell strength to the 200-day simple moving average of $193.91. 

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

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