Schaeffer's Outside the Box Blog
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Perhaps you've heard the term "Apple Death Cross" bandied about recently. No, its not a band opening for Metallica and Anthrax at next summer's Sonisphere Festival. It refers to the downsloping 50-day moving average in Apple Inc. (NASDAQ:AAPL) knifing through the 200-day moving average. It's said to be curtains for a stock when this happens, though Schaeffer's own Senior Quantitative Analyst Rocky White recently established that it's only a bearish formation for the first 2-3 weeks after it occurs. Beyond that … it's potentially bullish. And given that we're a week into the death cross and AAPL, thus far, has made lower lows, who knows -- maybe it's time to start thinking bullishly.

Of course these are just a couple of indicators. Are Apple options telling us anything? Phil Pearlman of StockTwits and Jared Woodard of Condor Options ponder that very subject in this interview.

They go over VXAPL, the CBOE's Apple Volatility Index. VXAPL applies CBOE Market Volatility Index (VIX) methodology to the Apple options board, thus it proxies 30-day implied volatility (IV). The VXAPL hit a recent high of 45, and then tapered a bit to 39. That's almost too perfectly in line with 10-day realized volatility (RV) in AAPL, which also sits at 39. IV tends to price higher than RV, so the options assume a modest downtick in RV for AAPL.

Jared's point, which I completely agree with, is that if you're using something like VXAPL to time a stock purchase, don't look to pick a top in VXAPL. Rather, miss the top and look for confirmation that it has reversed. In this case, for example, wait until it drops below its 20-day moving average in the mid-30s before looking to it as a buy signal in the stock.

Volatility indicators are best used in relative terms, NOT absolute terms. The VIX itself can be fat at 20 against one backdrop and cheap at 30 against another backdrop. Stock-specific volatility works the same way. Realized volatility in AAPL has clicked higher in the past two months, rising from the 20s into current readings in the mid-30s. Implied volatility has pretty much moved the same way, popping from 30-ish to the low 40s. So … not much to see, in this respect.

And versus itself, I'd look at it similarly to how I would look at the VIX. Is it stretched versus its 10-day moving average? Not really. At its peak last week, it only got about 12% above this trendline. Is it trending? Well, we can't say the uptrend is over yet on this basis, as it's still above the 10-day.

In other words, it's like Jared said in the video -- not much of a signal just yet.

It feels like a longer-term buy sets up, but not quite yet, and I tend to think pre-anticipating this sort of thing leads to all sorts of bad trades. So I'm inclined to wait and potentially miss THE bottom.

Disclaimer: The views represented on this blog are those of the individual authors only, and do not necessarily represent the views of Schaeffer 's Investment Research.

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