Making the Bearish Case for Apple Inc. (AAPL)

Sentiment is upbeat toward Apple Inc. (NASDAQ:AAPL), despite the tech stock's recent troubles on and off the charts

Dec 2, 2016 at 10:46 AM
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Tech stocks have been under pressure this week, amid concerns over weak demand for Apple Inc.'s (NASDAQ:AAPL) iPhone 7 -- which has stoked caution among the analyst crowd. These concerns appear to be validated, too, with reports circulating today that Apple has asked its suppliers to reduce iPhone 7 output over the next two quarters, amid lagging demand in China for the most recent iPhone iteration. According to Schaeffer's Senior Equity Analyst Joe Bell, CMT, considering AAPL stock "has high expectations and positive sentiment, but is rolling over at the $110 area," this could signal near-term caution for the tech titan.

Looking at the charts, AAPL has shed nearly 8% since hitting its most recent high near $118.70 in mid-October -- and is now south of $111-$112 range, which is a roughly 50% retracement of its late-October post-earnings drop. What's more, as Bell notes, AAPL stock is now staring up at the call-heavy $110 strike, last seen trading at $109.24. Additionally, the 50-day moving average is directly overhead, and appears to be rolling over.

AAPL daily chart dec 2

Drilling down on the $110 area, this strike is home to a lofty accumulation of call open interest across all series through front-month options expiration (Friday, Dec. 16), with close to 80,000 contracts outstanding -- and second only to the 115 strike, where around 240,000 calls are currently open. In the standard December series alone, nearly 55,000 contracts are housed at the 110 strike, which could reinforce technical resistance in the near term, as the hedges related to these bets unwind ahead of expiration.

AAPL open interest configuration

Additionally, as Bell notes, "almost no shorts target the stock and we saw a 20% decline in short interest over the past month." In fact, with just 44.5 million AAPL shares sold short, short interest accounts for less than 1% of the stock's available float, or 1.2 times the average daily pace of trading. Not only does this mean that there is little to no sideline cash available to help fuel future rally attempts, but also that AAPL could encounter a fresh wave of selling pressure, should shorts start to target the security.

Lastly, Bell points out that AAPL could be a strong contender for downgrades, considering only two of 34 covering analysts recommend selling the stock. Should Apple Inc. (NASDAQ:AAPL) continue to struggle both on and off the charts, a round of bearish brokerage notes could translate into headwind for the shares.

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