In the world of stock trading, the term “death cross” often sends shivers down the spines of investors. This technical indicator, which occurs when a stock’s short-term moving average crosses below its long-term moving average, typically signals a loss of positive momentum and can herald the onset of a corrective cycle or even a bear market. However, contrarian investors often view this signal as a potential buying opportunity, believing that much of the negative news has already been factored into the stock price. Recently, macroeconomic challenges, including tariffs and trade tensions, have weighed heavily on U.S. stocks, with tech giants like Apple (AAPL) experiencing significant declines of around 15%.
Over the past week, Apple’s stock has faced a tumultuous ride, culminating in a death cross that has raised questions about its future trajectory. To understand the implications of this technical signal, investors must delve into historical data and statistical analysis. While the death cross can be interpreted as a buying signal, timing is crucial. Based on past performance, AAPL stock has printed five death crosses in the last decade, occurring in August 2015, December 2018, June 2022, October 2022, and most recently on March 14, 2024.
A closer examination reveals that AAPL stock has historically declined four out of five times one month after a death cross, resulting in a contrarian success ratio of only 20%. This suggests that simply buying the stock in response to the death cross may not yield favorable results. However, the outlook improves significantly over a three-month horizon, where the contrarian success ratio rises to 80%. The average return during this period stands at an impressive 11.47%, indicating that AAPL stock tends to recover and rebound after the initial shock of the death cross.
For investors looking to capitalize on this potential rebound, a strategic approach is essential. Assuming that AAPL stock will rise by double-digit percentage points within three months, a targeted options strategy can be employed. The recommended options chain would expire on July 18, with a price target of $210 based on the stock’s closing price of $188.38 on the day of the death cross.
One effective strategy is the bull call spread, specifically the 205/210 call spread expiring on July 18. This involves purchasing the $205 call option while simultaneously selling the $210 call option. This approach allows investors to offset some of the costs associated with the long call by receiving a premium from the short call. The bull call spread effectively balances risk and reward, providing a more cost-effective way to participate in the anticipated rebound.
While the bull call spread offers a way to mitigate risk, it is important to note that selling the call option creates an obligation if the stock price rises above the short strike price. This means that while the potential for profit is capped at the short strike price, the strategy still allows for a favorable risk-reward ratio.
Ultimately, the choice of options strategy will depend on individual risk tolerance and market outlook. The 205/210 call spread presents a compelling opportunity for investors looking to navigate the complexities of Apple’s death cross while positioning themselves for potential gains in the coming months. As always, thorough research and careful consideration of market conditions are essential for making informed investment decisions.
