Wednesday, December 23, 2015

AAPL Update #55

After the past week's price action, I am revisiting AAPL to take a look at where I expect price to turn based on past supply and demand.

I have posted a clean chart to illustrate my points. I do not apply any indicators, just some horizontal lines to indicate where I believe AAPL can move to based on supply/demand. This is what I am expecting in future price action.

Firstly, here is my price prediction for what its worth!

Its down. Obviously.

AAPL is in a downward price move that is obvious from the recent red candles. The question where will price turn next?

Figure 1. AAPL Weekly Supply and Demand

Why do I use a weekly chart? 

I want use a timeframe that filters out noise and clearly marks supply (selling) and demand (buying) zones. Each zone is marked by an explosive move indicating that price was no longer in equilibrium. Because the time frame is weekly, this marks considerable time of price moving away from these points. The price is changing strongly because of the sustained selling and buying. Because it changed strongly, that indicated there was lots of unfilled buy and sell orders. If all the orders were filled, then price would not have been able to move. A static price means the buy-sell orders are equal at that level.

The Supply Zone

The closest and untested weekly supply zone is from 117.73-119.85, about a 2pt wide spread. Remember this is over a 7 day period the point at which I expect any rally to run into trouble. For those thinking that 120+ is going to happen instantly are just wishing (at least until earnings).

The Demand Zone

Here is where it gets interesting. Everyone is predicting a strong bounce at all levels now that price has declined. They are right about one thing, only that price has declined. No where on the weekly chart indicates that there are buyers at their levels.

There was a daily demand zone with the bottom end around 107.49. That price level was already tested previously and then breeched strongly the past week. That level is now gone.

In fact, the large pivot low at 92 formed during Aug tells you that. If there were always so many buyers, price should have never gotten as low as 92. What tells you that its possible now? Nothing. Everyone selling puts at 105 and 100 "resistance" may end up being reluctant stock owners in the weeks ahead.

Looking left and down shows two weekly zones. One zone has already been touched. You guessed it - its the 92 level, 92.00-88.91 to be exact is one demand level.

The next real untested demand level is at 84.28 - 82.86.

Price will ultimately decline until it reaches a new demand zone. One zone is already tested which means if another test happens that zone will be weakened and there is a good chance of it falling further to the 84 level.

Now consider what will be happening as price moves toward any of these levels. If it declines further, everyone using regular technical analysis is going to further selling because it has breeched their averages above. The sentiment will be one of strong selling, just as it hits a demand zone.

The same for the supply zone. All the buyers will be buying right into a selling zone.

The Collar Position

First, the target for placing short calls is in the 118-119 zone and not any higher. I am at the 107 price level now so that gives about 11pts of profit to roll.

Second the target on the downside is around the mid-80s. It is at this point where I would sell out any puts and create a much wider collar and wait before selling calls, or sell calls much farther OTM.

The grey zone is a just a area divided into thirds. The upper third is where I expect selling to happen aggressively and the lower third is where I expect more buying to happen. This of course is opposite to what sentiment and retail will be doing.

Are these levels written in stone? No of course not. A large buyer or seller can create new levels. This needs to be from an institution - not retail. Institutional footprints will be visible in the price action. Earnings may the catalyst that moves price toward either level.

For now, the current probabilities are highest here. These rest is just noise.

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