AAPL: Breaking Out?

~reposted from pebblewriter.com

AAPL has bounced nearly 50 points since its Jan 25 low, leading many to wonder whether the worst is over.  When I started this post about a week ago, all the talking heads were talking "breakout."  We'll give the old crystal ball a polish and see whether that's likely.

When I posted that AAPL seemed to finding support back on the 24th, it was because of the long-term channel (in purple, below) that's guided its upside since the year 2000 [see: That All You Got?] The top of it, by the way, is up around 1775.

AAPL bottomed the next day at 435 (one point from our Nov 27 forecast), and obviously still hasn't broken that channel.  The channel top, by the way, is currently up around 1880.

As we've noted before, there are other long-term channels at play, too.  Note the white channel casts a rather bearish pall, while the yellow channel promises at least a bounce here.  So, which to believe?

GETTING HERE


We've been very fortunate in forecasting AAPL over the past several months, calling several significant tops and bottoms with decent accuracy.

Nov 8:  Harmonics Are Your Friend:  

It looked like AAPL was about to bottom out, followed by a sizable bounce.

"AAPL should get a brief bump higher as SPX does — perhaps to 600 or 620.  Of course, if it stalls there, it will have formed 5/6 of a huge H&S pattern... "

It bottomed 6 sessions later when the S&P 500 dropped down to tag our 1344 target  [see: Charts I'm Watching Nov 15.]  From there, we were looking for a bounce to 600.

Nov 27: Update on AAPL:

As AAPL approached our 600 target, I anticipated a reversal and completion of a Head & Shoulder Pattern that would bounce first at the neckline before plunging below.

"A reversal here could quite likely spell a return to the channel bottom — which will be around 434...
...it’s easy to imagine a scenario where prices drop to [the neckline at] 500 into the end of the year, but can’t quite seal the deal on the H&S pattern...
If, on the other hand, AAPL breaks down below [the neckline], look for a back test followed by a more serious plunge."

AAPL topped out two sessions later at 594 and plunged to the neckline at 501 where it failed to "seal the deal,"  bouncing for two weeks before finally falling below the neckline on Jan 15.

It back-tested the neckline for a week before taking a "more serious plunge" down to 435, one point from our original Nov 27 target.

GOING FORWARD


The purple channel has done its job so far.  Can it continue to stave off the damage of the completed Head & Shoulder Pattern?  H&S Patterns commonly back test their necklines.  Back tests can even exceed the neckline, as has AAPL's in several cases.

As we've discussed many times, AAPL has been in a fairly tight price channel all the way down from 705 (below, in white.)

The upper bound of this channel intersects with the H&S neckline at about 498-500 around Feb 19 (there is some wiggle room, depending on exactly how the channel is drawn.)  This likely represents the extent of any short-term upside.

As for the downside, the white channel midline intersects with the purple channel at about 450-452 around Feb 20.  The white upper bound intersects with the purple channel bottom  465 on Mar 18.

But, note the large red falling channel.  It's dicey to consider it well-established, since the "top" consists of only one tag.  But, it looks to me like it has potential over the medium-term.

Today, AAPL is testing its 25% line; and, a close above 473 or so would be positive -- arguing for the more bullish of the two scenarios above.

The daily RSI recently poked up through the white midline and the yellow 75% line, but appears to be backtesting both.  This would be consistent with a dip to 450, where AAPL could back-test the white price channel midline and the purple channel bottom (the purple circle.)

From there, the top of the yellow RSI channel beckons -- which probably corresponds with a return to test the neckline around 500.  As noted above, this could occur as soon as Feb 19 if prices are to remain in the white channel.

And, what if prices break out of the white channel?  Keep an eye on the RSI.  A break above the neckline would probably require a break out from the yellow RSI channel.  While, remaining in the yellow channel probably means a period of consolidation until early May, when the purple channel and neckline intersect at about 490.

One other issue often discussed is the expiration of the 30-day wash sale period.  The biggest volume spikes in the past few months were the plunges of Nov 16, Dec 6, Dec 14 and Jan 24-25.  So, the only remaining relevant buyers who might rush back in are those who sold in the 435-465 range on Jan 24-25.

Since the stock has gained a few points since then, these sellers might be expected to believe the worst is over and that it's safe to re-enter at these levels -- especially since the rest of the market is setting new highs.

continued on pebblewriter.com

AAPL: Flirting with Disaster

Not since the summer of 1666, as young Zack Newton sat pondering gravity, has so much attention been paid to a falling apple.

Should we care about AAPL's deteriorating powers of levitation?  The $200/share drop since its September highs, especially on the heels of a new dividend and share buyback program, has been unnerving.  But, if you invest based on fundamentals, it's a solid company selling at 11 times earnings and a 62% 5-year CAGR -- which happens to be on sale.

If you pay attention to chart patterns, however, AAPL is flirting with disaster.  It's a mere point or two from completing a Head & Shoulders pattern that targets the low 300's. [To read about how H&S patterns work, click HERE.]

Even if you don't give a darn about chart patterns, know that many other investors do.  The four tags of the white trend line (the neckline) in the past month are ample proof.  So are the many previously completed patterns that weighed on AAPL.

In January 2008, AAPL completed a H&S pattern that saw share prices drop from 200 to 115 in a few short weeks.

Buyers at 115 were rewarded with a rebound to 190, then punished by a plunge to 78 as the rebound completed a right shoulder in a much larger H&S pattern.

Not every pattern plays out, of course.  Consider the pattern below from 1993-1994 -- a well-formed pattern that targeted much lower prices.

Instead of a big drop off, AAPL found channel support before much damage was done.  Prices rebounded to new highs where they formed a new pattern (in white) which did play out.

Like any other chart pattern, H&S patterns don't occur in a vacuum.  Channels and harmonics often influence the ultimate outcome.

The channel that saved the day in 1995 is still with us, though it most recently offered resistance to higher prices instead of a floor.  It's the white channel in the chart below.

The much smaller, steeply rising purple channel, on the other hand, has kept prices rising -- putting AAPL back on track after two significant sell-offs.  It's currently around 445 -- within a few points of the Crab Pattern 1.618 extension of the failed mid-November rally.

If the current H&S pattern plays out and AAPL drops below the purple channel support, there's another, less bullish channel that could come into play -- seen in yellow below.

The next lower channel line is in the vicinity of the purple line referenced above: 430 or so.  But, if gravity takes hold, mid-line support doesn't show up until around 300.  Ouch.

There are a dozen or more other patterns that could easily influence AAPL's future. There are also many fundamental events that could strengthen the price.

The company's current share buyback scheme, for instance, is only $10 billion -- about the average daily volume at $500/share.  But, with $120 billion in cash on the books and virtually no debt, the company could easily expand it to a more meaningful level.

If this most widely held stock were to crash, could the rest of the market be far behind?  I think there's little question it would. Such an outcome would spell disaster for the bullish story line that TPTB have been working so diligently to construct.

Might they join company insiders in supporting the stock here at 500?  It would be a lot cheaper than another round of QE and, in the end, probably more effective.

Stay tuned.

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reprinted from pebblewriter.com