Mar 5 – STO Mar 8 Weekly $430 call @ $6.
Mar 7 – BTC Mar 8 Weekly $430 call @ 3.65
Mar 12 – STO Mar 15 Weekly $440 call @ 4.20

Catching a falling knife is usually a loser’s bet, and I’m not calling the bottom right now, but I do believe that Apple has fallen to an important support level around $418-$427 zone where it first launched the huge parabolic move in January of 2012. I’m adding a starter position in Apple here, and will buy more if it should fall to further support zones. As of right now though, It’s from this $420 level that Apple staged an earnings related gap up to the $440 and by April it was at $640. The pattern topped out at $700, and the stocks been in free fall since then. A bearish head and shoulders pattern price projection targets Apple falling $40 more dollars down to $380, so we could still have some more downside to go before a meaningful bounce. If shares should fall to that level I would add to this position.

Technically, besides being in an obvious free fall, it’s in a falling wedge pattern. These patterns resolve to the upside 68% of the time based on Tom Bulkowski’s studies, which is good for Apple. I have taken my best guess as to what could possibly happen in the next month or so of trading, and there are 3 possibilities. See the chart I’ve marked up below showing scenario A, B1, and B2. Scenario A has Apple breaking above the upper trend line of the wedge and rising up to $590. Scenario B1 has Apple breaking below the lower trend line of the wedge and falling down to $290. Scenario B2 has Apple finding support at $380 and bouncing between the upper and lower trend lines aimlessly as the stock finds no willing sellers or buyers. Scenario B2 would eventually resolve up or down, but it’s the scenario that will happen if things stay status quo as they are today.

In terms of Revenue, Net income and Profit margin for AAPL, the Q4 2011 revenue and earnings result is what sent the stock on its rise. The oddity is how AAPL’s stock continued to rise in subsequent quarters while revenue and income dropped. Let’s just say that the fundamentals did not matter – people were paying up for Apple’s perceived infinite earnings growth potential. Investors got a sour taste though when new products failed to excite and the Iphone 5 maps debacle took the shine off the Apple. Last quarter’s result was encouraging from a trend perspective though, and the company is actually making about the same amount that it did in Jan 2012 (actually a little higher now though), when AAPL was trading at the same price it is now. How’s that for symmetry?

So we are at an important psychological level for Apple shareholders. Is Apple a value at this price, or a value trap? Is it a short sellers easy picking, or is it technically oversold and ready for a short squeeze? Who knows right now, but to put it in perspective from a valuation standpoint, Apple’s price-free cash flow ratio right now is 9, compared to Google’s which is 20, and Blackberry’s which is 8. You tell me which company Apple is more like, Google or Blackberry? Yeah, I thought so… Apple’s share price should be a lot higher than it is right now.

I’m convinced that by June expiration , we will see something happen that will cause investors to come back to the stock Potential things that could happen: Upside earning surprise, an acquisition, an increase to the dividend, a change to the board to force strategy changes, or maybe the next “I-Nnovation”!

Chart courtesy Finviz. Click to open larger.

Additional Image Provided by Terrence:

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