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Apple is in a correction, and one market watcher sees possible bear market ahead

Apple is in correction territory just days ahead of earnings. Here’s how to trade it
Apple is in correction territory just days ahead of earnings. Here’s how to trade it

Apple is trading in correction territory just days before it's set to release earnings. One market watcher sees the possibility of another 10 percent drop ahead.

"We would have a hold on this. We could see potential 5 to 10 percent additional downside," Chad Morganlander, portfolio manager at Washington Crossing Advisors, told CNBC's "Trading Nation" on Thursday.

Apple sits 11 percent below a 52-week high set in mid-March, putting its losses at more than the 10 percent drop marking a correction. Another 10 percent decline would put its shares down more than 20 percent from that March high and tip them into a bear market.

"The uncertainties are regarding China and the demand of iPhone sales within China," said Morganlander. "People in China are not actually wanting to buy these high-end phones. So, gross margins as well as operating margin vulnerability there in the short run."

China accounts for nearly one-fifth of Apple's total revenue. Sales in the region have contracted in the past two years after double-digit growth from 2012 to 2015.

Over the long term, Morganlander has a more bullish view of Apple's fundamentals, calling the company a "true value play."

"Over the long run, we believe that subscription growth on the developed market side through many of their channels of other business lines could actually provide a P/E multiple enhancement in year four and five" of a five-year timeline, Morganlander said.

Sales in Apple's software and services segment are forecast to pick up speed in coming quarters. Segment sales are expected to rise 19 percent in its March-ended second quarter and 16 percent for the full fiscal year.

"So, short run, we would be avoiding it, we'd be on hold. But in the long run we'd be buying it if you have a five-year horizon," said Morganlander.

The charts don't look good for Apple performance in the short term, according to Mark Newton, technical analyst at Newton Advisors.

"Apple likely continues its string of underperformance. The relative strength really started to flatten out last November," Newton told "Trading Nation" on Thursday. "The stock right now is up against its upper area of channel resistance going back over the last few years."

Apple shares stalled out at $180 after hitting their one-year intraday high in mid-March and have since scaled back to levels not seen since November, Newton said.

"At current levels it's tough to see a lot of incremental upside in the stock," he said. "It's been going sideways really for four months and it's really begun to underperform the broader Nasdaq and really a lot of technology."

Apple's stock has dropped more than 4 percent since the beginning of the year, trailing the Nasdaq's and XLK technology ETF's roughly 3 percent rise.

"Until that shows signs of improving, I'd be a buyer on pullbacks right near $130 and really a seller up near $180," Newton said. "I think it's going to continue to trade really neutral and range bound for the time being."

A decline to $130 would represent a nearly 20 percent drop from current levels. Its shares are currently 11 percent from $180.

Apple is scheduled to report earnings after the bell Tuesday.


Disclosure: Neither Morganlander nor Washington Crossing Advisors have a position in Apple.