It is no secret that stocks are prone to sudden moves in either direction. This could be triggered by economic data, geopolitical events, stock-specific news, or market sentiment.
Trading such volatile stocks are usually considered a high-risk-high-reward venture. Many traders opt to stay out of the trade rather than risk a loss. However, careful analysis of the charts could help you to enter at the right levels, thereby limiting risk to an extent.
With this in mind, we have started a new weekly series on the trending stock of the week —stocks that are featured heavily in the news.
This week’s stock pick is Apple Inc. (NASDAQ: AAPL), the California-based American multinational technology company well-known for its digital gadgets like Macs, iPods, iPhones, and iPads.
Why is AAPL trending?
Apple Inc. had surged by 460% over the past five years, leveraging the strength of its hardware business and closed ecosystem. The tech giant’s annual revenue for 2020 was $274.5 billion while its annual net income reached $57.4 billion. The stock has been up by nearly 65% in the past 12 months.
The stock has been trending recently due to reports about the development of augmented reality (AR) headset with a target launch date of 2022, followed by a lighter pair of AR glasses in 2023; the launch of iPhone 12, Apple’s first family of 5G devices; push towards Apple’s own ARM-based CPUs instead of Intel’s x86 CPUs; and its growing services ecosystem, which includes the App Store, Apple Music, Apple TV+, Apple Arcade, Apple Pay, and other services.
However, the stock had moved lower recently due to the news of Warren Buffett trimming Berkshire Hathaway’s stake in the tech giant. Buffet had recently sold nearly 57 million shares of AAPL.
Here’s how to trade AAPL right now.
AAPL Chart
On analysis of the daily chart of APPL, the overall trend of the stock seems to be up and the current decline in the price appears to be a short-term correction.
#1 Uptrend Unbroken: The daily chart shows that AAPL’s uptrend is unbroken, as it has been forming higher highs and higher lows for the past several months. This uptrend line has been marked as a purple color line. The stock had taken support near this trendline multiple times before bouncing higher again.
#2 Near Fibonacci Support: Usually, after an up-move, stocks retrace to any of the key Fibonacci levels before resuming its upmove. The daily chart shows that the stock is currently nearing the support level of the 61.8% Fibonacci retracement level. This seems like a good support area for the stock to bounce higher.
#3 Oversold RSI: The Relative Strength Index is currently near oversold levels. This indicates that a reversal may be imminent.
Recommended Bullish Trade (based on the chart)
Buy Levels: If you want to get in on this trade, the buy level for AAPL is in two scenarios. These are marked as green color dotted lines in the daily chart.
- Buy Level #1: You can purchase the shares of AAPL if it reaches the nearest Fibonacci Support level of 61.80%, which translates to a price of $110.00.
- Buy Level #2: You can purchase the shares of AAPL if it corrects to its trendline support, which translates to a price of $80.00.
Important Note: Make sure that you only enter the trade once the daily close is above the recommended price level.
TP: Our target prices for various buy levels are as follows
- The target prices for Buy Level #1 (110.00) are $140 and $160 in the next 3 to 6 months.
- The target prices for Buy Level #2 ($80.00) are $100 and $120 in the next 3 to 6 months.
SL: To limit risk, place a stop loss at the following levels.
- The stop loss for Buy Level #1 (110.00) is $96.00.
- The stop loss for Buy Level #2 ($80.00) is $69.00.
Note that the stop loss is on a closing basis.
Target Upside: Our target potential upside is 25% to 46% in the next 3-6 months.
- Entry at Buy Level #1(110.00): For a risk of $14.00, our first target reward is $30.00 and the second target reward is $50.00. This is a nearly 1:2 and 1:4 risk-reward trade.
- Entry at Buy Level #2 ($80.00): For a risk of $11.00, our first target reward is $20.00 and the second target reward is $30.00. This is a nearly 1:2 and 1:3 risk-reward trade.
In other words, this trade offers 2x to 4x more potential upside than downside.
Risks to Consider: The stock may reverse its overall trend if it breaks down from the Fibonacci support and trendline support levels with high volume. The sell-off of the stock could also be triggered in case of any negative news, overall weakness in the market, or any regulatory changes in the sector.
Recommended Bearish Trade (based on the chart)
In case the stock breaks down from the 61.8% Fibonacci support and closes below the gap support, it would point to an upcoming short-term correction. In that case, below are the entry level, stop loss level, and target prices.
Sell Level: You can take short positions on AAPL below the price of around $105.00. This sell level is marked as a red color dotted line in the chart.
Important Note: Make sure that you only enter the trade once the daily close is below the recommended price level.
TP: Our target prices are $90 and $80 in the next 3-6 months.
SL: To limit risk, place a stop loss at $113.00. Note that this stop loss is on a closing basis.
Our target potential downside is 14% to 24% in the next 3-6 months.
For a risk of $8.00, our first target reward is $15.00 and the second target reward is $25.00. This is a nearly 1:2 and 1:3 risk-reward trade
In other words, this trade offers nearly 2x to 3x rewards compared to the risks.
Risks to Consider: The stock may reverse its overall trend if it breaks upwards with high volume. The breakout of the stock could be triggered in case of any positive news, overall strength in the market, or any regulatory changes in its sector.
Happy Trading!
— Trades of the Day Research Team
Note: Even after the sale of 57 million shares of AAPL, Berkshire still owns 887 million shares, which today are worth more than $117 billion.