Apple's Future Depends on High Apple Pie in the Sky Hopes

Oops there goes another rubber tree plant Oops there goes another rubber tree plant Just what makes that little old ant Think he'll move that rubber tree plant Anyone knows an ant, can't Move a rubber tree plant But he's got high hopes He's got high hopes He's got high apple pie In the sky hopes. Apple's AAPL best quarterly earnings came during last Christmas season. They earned 3.67. In Q2 1-1-, Apple introduced the new i-pad and they earned 3.51, less than the Christmas season sales. Apple launched another new product in Q3, the new 1-phone 4. The launch of the i-pad In Q2 did not push Apple's Q2 earnings to record highs. However, it is hoped with the launch of the i-pad in Q2 and i-phone in Q3 that Apple can now earn $4.08. This is more than 10% above Q4 09 x-mas season earnings and 16% more than last quarter. At least, that is what the analysts are forecasting. Apple hasn't missed an earnings forecast since 2006, so Bloomberg informs me. This may change sooner than later because analyst earnings forecasts may now be too optimistic. Apple's actual earnings in Sept 2009 beat forecasts by 95%. In the most recent quarter Apple's actual Q2 earnings of 3.51 only beat the Q2 forecast of 3.12 by 12%. Because of the optimism surrounding Apple's Sept 10 earnings report, its stock price gapped up on Friday, ahead of the actual earnings report. Rather than wait for Apple to report earnings and then gap up as they did in Oct 2009 and April 2010, investors saw fit to front run the expected glowing news. Investors believe Apple is that little old ant that can move a rubber tree plant. They have those “high apple pie in the sky hopes” for Apple's Sept 2010 earnings. Gosh, it would be awfully sad if they disappointed investors hopes one of these upcoming quarters. Behaviorally, Apple's stock price has behaved rather predictably when it gaps up during recent earnings season. It does a little “exhaustion gap” dance. (see chart below) In October 2009, Apple's stock price did the Texas two-step, gapping higher on the upside earnings surprise and exhausting the following day. After its Texas two-step gap dance, Apple's stock price declined 12% over the course of the next two weeks. And that was when Apple's earnings beat forecasts by 95%. In April 2010 Apple's reported Q1 earnings that were 36% above analyst forecasts. It's stock did another little gap dance. This time it was the Tennessee Waltz a three step dance higher. After the waltz, Apple's stock price declined 15% over the course of the next several weeks (I am discarding the May flash crash as relevant). This time around, it appears Apple investors are doing the Texas two-step exhaustion gap dance“before” the earnings announcement. In any case, either the Texas two-step or the Tennessee Waltz will stop this stock advance in its tracks. Note that the distance that Apple traveled from the bull gap lows of Oct 2009 and Oct 2010 are roughly the same distances traveled in time and price. And the distance Apple traveled aft the April bull gap low was only a smidge further in time and price. The exhaustion gap models suggest Apple sets a short term high between 320-325. It's the same trade setup. If the earnings are bullish, perhaps only a 12% pullback ensues, but investors will have to absorb a it to about 279-ish from today's 319 high. If the earnings disappoint, expect a test of the quarterly light blue average sloping into 267 supporting the swing high at 266. The quarterly light blue average supported Apple's stock price in Dec 2009 and May 2010 after the bullish earnings announcements a few week's prior. If earnings really disappoint, not even the quarterly average will help investors much in the coming weeks.