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Here is my thought process going into tomorrow’s trading for AAPL:

1. AAPL initial reaction was positive due to a combination of lowered expectations and very good Iphone sales which generate the majority of AAPL’s profits. About $1 billion of shares changed hands in the first few minutes after the report so enough larger players were involved to conclude that buying interest was real.
2. The first step in establishing a short term trading bias after a company reports is to observe after hours trading activity. Overall, the entire after hours session was moderately bullish. The initial thrust above 430 held with AAPL settling around 435. An after hours close above 440 would have been more bullish making short sellers uncomfortable but we still may see that price action in the pre-market.
3. The second step is to observe pre-market trading which we can’t do until tomorrow so you are on your own unless you tune in to my pre-market meeting where I will discuss the stocks In Play for the day.
4. When a stock reports earnings and has an initial positive reaction with heavy volume the burden is on the sellers to prove that the gap will not hold. On the chart below I have labeled an area the “quick drop” zone. For AAPL to be a good short it must drop below this zone when the market opens AND have a very meager bounce. It is normal behavior for a stock that has a large gap to see profit taking at 9:30 and this is not bearish UNLESS the stock fails to immediately bounce back above this zone.
5. AAPL has a history of nasty dropouts on the Open after it reports and this does not impact its ability to trend higher for the rest of the day.
6. From a bigger picture perspective AAPL has been moving sideways for several months after its previous earnings report but it has established a series of “lower highs” in this consolidation. Tomorrow it will have a chance to break this pattern and build a stronger case that the bottom is in. See the daily chart below.

A close above 445 should lead to a more sustained uptrend and no more sub 400 prices unless/until some very negative fundamental news were to occur.

Steven Spencer is the co-founder of SMB Capital and SMB University and has traded professionally for 17 years. His email is [email protected].

No relevant positions

If you would like to learn how to think like a professional trader pick up a copy of The Playbook today! Top 10 in Amazon Finance and from the author of One Good Trade the #1 Trading book in 2010.