Chart Of The Day: Why Apple Earnings Could Beat Expectations Yet Cause Sell Off

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Tech behemoth Apple (NASDAQ: AAPL ) is scheduled to report Q1 2022 earnings on Thursday, Jan. 27 after the US market close. Expectations are for EPS of $1.89, up from $1.68 for the same quarter a year ago. Revenue is seen to be $118.68 billion, a jump from the $111.44 billion posted during last year's corresponding quarter.

The Cupertino, California-based company beat on both numbers last year ; analysts predict that the iPhone maker will beat consensus expectations again this quarter.

Still, even if it beats, Apple's stock could sell off anyway. Investors are jettisoning technology shares, which represent growth stocks and currently possess the highest, most frothy valuations. What's happening across the broader equity market right now is bigger than Apple—the world's largest company based on its market cap of $2.652 trillion. 

Traders are now pricing in a 25-basis point Fed rate hike in March, which would make money more expensive, increasing the difficulty of justifying overstretched tech valuations. As investors rotate into cheaper cyclicals and out of tech, being the biggest mega cap tech company could turn into a liability.

Indeed, last week, the NASDAQ lost 7.6%, lagging peer US major indices, which all suffered their worst weekly performance in months. 

On the other hand, Apple's earnings report takes place after the conclusion on Wednesday of this month's Federal Reserve meeting. Should upcoming Fedspeak be more dovish than expected, investors are likely to reverse back into technology stocks and Apple in particular.

With fundamental triggers still fluid, could technicals be providing additional clues to where the supply-demand dynamic currently stands?

AAPL Daily

Apple completed a small top, supported by the 50 DMA. What's tricky about this top is that it developed above the price's uptrend line since the notorious March 2020 bottom, guarded by the 100 DMA.

This means the stock could bounce off that uptrend line and resume moving along the ongoing uptrend. However, if the top's implied target is fulfilled, the price will then penetrate the uptrend line as it heads lower.

While both the daily RSI and MACD have triggered sell signals, they might be nearing oversold conditions after the stock fell into correction territory, having lost more than 10% of value since its Jan. 3 record close.

Trading Strategies

Conservative traders should wait for a new high before taking a long position; alternatively wait for the price to fall below the uptrend line, then a retest of it from below before selling.

Moderate traders would sell if the price retests the top's neckline or buy when it reaches the uptrend line.

Aggressive traders could short at will, according to a coherent trade plan. Here is an example:

Trade Sample

  • Entry: $164
  • Stop-Loss: $165
  • Risk: $1
  • Target: $160
  • Reward: $4
  • Risk-Reward Ratio: 1:4

Author's Note: We're not in the fortune-telling business. A technical forecast is an expectation based on analysis derived from historical data. We do not know what will happen with this particular trade. Rather, what we're saying is that if traders behave as they have previously in this situation, the outcome is more likely to follow through in a certain way, as described above, based on our interpretation. To increase the odds for improved returns overall, you need to learn how to write a plan that meets your timing, budget, and temperament, rather than work on a trade-by-trade basis. Until you learn how to do that, you may use our samples to practice, but don't necessarily expect profits. That occurs when you gain enough experience to develop your own trading style.

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