This is (probably) how low Apple’s stock will go

The Arora Report published a “sell” signal on Apple’s stock before the iPhone 8 and iPhone X launch.

At the time, Apple AAPL, -0.98%  was trading around $164. Please see “Investors who recently bought Apple’s stock should consider locking in profits.”

Now that that call has proven to be correct, I am being asked by investors: “How low will Apple go?”

Let’s explore that question with the help of two charts.

Please click here for a short-term chart of Apple stock.

Please click here for a long-term chart of Apple stock.

Read: Apple’s ‘short-term pain’ sets stock up for long-term gain

Please note the following from the charts:

• The short-term chart shows the gap that occurred after Apple reported blowout earnings.

• In traditional technical analysis, gaps are often filled. If traditional technical analysis holds, Apple stock may fall to about $148.

• With the widespread availability of technical analysis, it no longer works as well as it used to back in 1970s and ’80s.

• The “smart money” tries to game the technical analysis. In practice and in plain English, it means that some smart players are likely to start aggressively buying well above $148 and put stops under $148.

• If Apple’s stock goes lower, some smart player knowing that there are stops under $148 may try to push the stock down by short-selling to take out the stops.

• Please note from the chart that RSI (relative strength index) is now oversold.

• The chart shows what happened to Apple’s stock the last two times that RSI was this low.

• Please note that RSI works well when the stock is range-bound but completely fails when the stock is trending.

• For the foregoing reasons, it is important to not rely solely on technical analysis. At The Arora Report, we follow the ZYX Change Method that has six screens that include fundamentals, money flows and quantitative analysis. The long-term chart is proof positive of the success of the ZYX Change Method with Apple. The take-away for investors is that, at a minimum, they ought to use several screens to make their investment decisions. As an example, please see my call to take partial profits in Apple stock right at the last top in “Smart money selling Apple.”

• The chart shows the support zone. It is not that hard to simply look at a chart and come up with a support zone. At The Arora Report, our buy zones are algorithmically determined. We advocate a sophisticated approach of scaling in and scaling out, and provide details of this approach to our subscribers. The current buy zone is $144 to $152.52, preferably under $148.67.

See: This could be worst iPhone launch week ever for Apple’s stock

Ask Arora: Nigam Arora answers your questions about investing in stocks, ETFs, bonds, gold and silver, oil and currencies. Have a question? Send it to Nigam Arora.

Markets are dynamic and for this reason the buy zones are reviewed daily. One big mistake I see investors making is that they have too much concentration in FAANG stocks. The other FAANG stocks are Facebook FB, -0.33% Amazon AMZN, -0.99%Netflix NFLX, -0.76% and Alphabet GOOG, -0.42% GOOGL, -0.45%

The other big mistake I see investors make is that they do not know how to properly size their positions. Investors who learn how to properly size their positions will significantly add to their returns over a large number of trades over a long period of time. Proper position sizing should be the first line of defense in risk control.

Furthermore, this drop in Apple’s stock is a good time for investors to review their portfolios to make sure they are properly diversified and their position sizes are correct.

It may be of comfort to long-term investors in Apple stock that The Arora Report is still holding the very long-term position bought at $18.73. A good technique to significantly add to the returns is to trade around a core position.