Will Apple crash 30% on China’s 'rare-earth' export ban?
The ongoing dispute between the United States and China has sent stock markets crashing lower in recent months. However, for Apple, it could just be the beginning if China decides to retaliate with several nuclear options available to them such as its 'rare earth' export ban. With Apple's stock price already in trouble, investor fear is on the rise.
In this article, we explain why Apple could be a major loser in an escalating US-China trade war and the possible trading opportunities around this historic situation. Let's get started.
How China could ruin Apple in 2019
The impact of ongoing trade tensions has caused many investors to rethink Apple's market valuation. After all, around 18% of Apple's worldwide sales come from China, and according to analysts at the investment bank Citi: "The US/China trade situation will result in a slowdown of Apple iPhone demand in China as China residents shift their purchasing preference to China national brands," which the bank believes could cut Apple's China sales in half.
However, China also has other nuclear options at its disposal that could have a major impact on Apple's share price. There is one tool that has investors and big company CEO's very worried: a ban on 'rare earth' exports.
China is the world's primary source of rare earth materials that are used all around the world in modern technologies. In fact, an iPhone contains several components that use rare earth materials in the camera, speaker, taptic engines and receivers. With 95% of the world's rare earth output coming from China, it would be a huge problem if they banned sales to American companies.
There is also the possibility of closing off access to Asia's biggest market, in the way Trump has done to Huawei. If Apple, and other US companies, were suddenly banned to sell their products in the country it could cause huge ramifications in the stock market. So far, China has kept retaliatory measures to a minimum but investors remain on edge.
How to trade Apple stock
The monthly chart of Apple's stock price shows a strong long-term uptrend with some significant retracements in its price, as the chart below shows.
Source: Admiral Markets MT5 Supreme Edition, AAPL, Monthly - Data range: from July 1, 2006, to June 3, 2019, accessed on June 3, 2019, at 11:31 am BST. - Please note: Past performance is not a reliable indicator of future results.
However, what has technical traders most worried is the presence of a negative price action trading pattern for May 2019 - a bearish engulfing bar formation. This has only happened three times before at the end of a move higher with two of those times triggering a significant move to the downside. The bearish engulfing bars are highlighted by the yellow box in the chart below:
Source: Admiral Markets MT5 Supreme Edition, AAPL, Monthly - Data range: from July 1, 2006, to June 3, 2019, accessed on June 3, 2019, at 11:31 am BST. - Please note: Past performance is not a reliable indicator of future results.
A bearish engulfing bar is a situation where the price trades above the previous bar's high but then crashes lower to trade below the previous bar's low. This shows a failure of buyers continuing the move higher and significant shift in sentiment towards the sellers who now seem to be in control of the market. Just how far could the price fall? Let's take a look at the timeframe below, the weekly chart:
Source: Admiral Markets MT5 Supreme Edition, AAPL, Weekly - Data range: from March 13, 2016, to June 3, 2019, accessed on June 3, 2019, at 11:44 am BST. - Please note: Past performance is not a reliable indicator of future results.
From March 2016 to August 2018, Apple's share price was on a steady rise higher. However, during the last months of 2018 many investors exited their positions causing the stock price to fall back to the $142 horizontal price level, as shown by the black horizontal line on the chart.
If sellers can now remain in control, traders will be eyeing the $142 level yet again. A move to this price level would result in a drop of over 30% from the high of May 2019. Traders may use a combination of trading indicators and price patterns to help time their trades on the lower timeframe such as the daily chart shown below:
Source: Admiral Markets MT5 Supreme Edition, AAPL, Daily - Data range: from September 28, 2018, to June 3, 2019, accessed on June 3, 2019, at 11:51 am BST. - Please note: Past performance is not a reliable indicator of future results.
The blue line in the chart above represents an 8-period moving average of price. Traders will often use this as an additional trend filter and look for 'short' opportunities when the price is below it while also look for 'long' opportunities when price is above it.
Traders may also consider using simple price action based strategies for possible entry, stop loss, and target levels. For example, a popular price action pattern is a bearish pin bar reversal. This is when a bar makes a new daily high, but then trades all the way back down and closes the day in the lower half of the bar.
On May 16, Apple's stock price formed a bearish pin bar reversal as the daily chart below shows:
Source: Admiral Markets MT5 Supreme Edition, AAPL, Daily - Data range: from January 31, 2019, to June 3, 2019, accessed on June 3, 2019, at 11:55 am BST. - Please note: Past performance is not a reliable indicator of future results.
Traders could have entered a sell order on the low of this bearish pin bar reversal at $188.83. A stop loss could have been placed on the high of the bar at $192.46.
With a 10 lot, or 10 share, position size, this would result in a possible $36.30 loss if the entry and then stop loss was triggered. However, in this instance, the share price continued to move lower.
Closing the trade at the end of the month on May 31 around its closing price of $175 would have resulted in a potential profit of $138.30.
Conclusion
If US-China trade tensions escalate, Apple's stock price could be in trouble. Having access to the right products, at the right time, can give traders a unique advantage in their trade preparation. How well prepared are you?
With MetaTrader 5 you can trade on multiple asset classes, as well as access superior charting capabilities, free real-time market data & analysis, the best trading widgets available, and much more! To download MetaTrader 5 now, click the banner below and receive it for FREE!
INFORMATION ABOUT ANALYTICAL MATERIALS:
The given data provides additional information regarding all analysis, estimates, prognosis, forecasts, market reviews, weekly outlooks or other similar assessments or information (hereinafter "Analysis") published on the website of Admiral Markets. Before making any investment decisions please pay close attention to the following:
1.This is a marketing communication. The content is published for informative purposes only and is in no way to be construed as investment advice or recommendation. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research, and that it is not subject to any prohibition on dealing ahead of the dissemination of investment research.
2.Any investment decision is made by each client alone whereas Admiral Markets AS (Admiral Markets) shall not be responsible for any loss or damage arising from any such decision, whether or not based on the content.
3.With view to protecting the interests of our clients and the objectivity of the Analysis, Admiral Markets has established relevant internal procedures for prevention and management of conflicts of interest.
4.The Analysis is prepared by an independent analyst Jitan Solanki, Freelance Contributor (hereinafter "Author") based on personal estimations.
5.Whilst every reasonable effort is taken to ensure that all sources of the content are reliable and that all information is presented, as much as possible, in an understandable, timely, precise and complete manner, Admiral Markets does not guarantee the accuracy or completeness of any information contained within the Analysis.
6.Any kind of past or modeled performance of financial instruments indicated within the content should not be construed as an express or implied promise, guarantee or implication by Admiral Markets for any future performance. The value of the financial instrument may both increase and decrease and the preservation of the asset value is not guaranteed.
7.Leveraged products (including contracts for difference) are speculative in nature and may result in losses or profit. Before you start trading, please ensure that you fully understand therisks involved.
