A Quick Look at AAPL

Mar 11, 2008: 11:25 AM CST

Apple (AAPL) has fallen from $200 per share to $115 in two months – a mammoth drop for such a strong, newsworthy stock. Let’s look at the charts to see what might be ahead next.

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Notice in early November 2007 how the large volatility price move sent shockwaves through the stock, and led to a ‘driving on fumes’ rally that set up a key momentum divergence as price gently made two new higher highs.

The large downthrust sent shockwaves that that led to aggressive distribution (by the insiders) into the hands of the public, who were buying for a variety of reasons, including,

“The price just made a new high and will keep going,”

“The iPhone will be wonderful”

“It’s Christmas, and everyone will be getting an iPod, iPhone or new Mac this year”

“I just don’t see how Apple stock could decline that far”

… along with other valid reasons such as fundamentals, earnings, etc. Nevertheless, these reasons – while valid – did not play out, or the demand created by these rationales did not overcome the supply or the larger tide of the market shifting into a downtrend.

I highlighted a key area on the chart that was the “Last Stand” for the bulls, which I marked with the Red Arrow in early 2008 when price fell beneath the key 50 and 20 period moving averages and rallied back to test these levels, but failed at the dual crossover zone, which created a massive resistance area. The large volatility move down (massive price rejection on higher volume) was the absolute final signal of any potential strength that was left in this stock.

This was a key signal for all longs to bail (a few skilled ones did) and for savvy traders to ‘get short.’ The price then cascaded lower and the price has not taken part in the broad market rally following the massive January 22nd market lows.

Price does appear to be forming a consolidation pattern that would resemble a type of ‘saucer’ or ‘rounded bottom’ type pattern (which may eventually form into a cup with handle).

A positive momentum divergence is developing, but always be very careful about gleaning insights from any momentum oscillator during a period of market contraction or consolidation. Remember that the market (price) alternates between range expansion and range contraction, and so it would make sense that following a massive period of price expansion (from $200 down to $115), then the market (price) would consolidate for roughly an equal period of time, so to allow traders to ‘digest’ these new price levels. Price may have found ‘value’ at these levels and needs to rest here for a pause.

There really isn’t a major reason to buy Apple stock from a technical (chart) perspective at the moment, but the bullish case may be gaining strength over the bears as price continues to diverge and consolidate. A clean buy signal could come when price penetrates the falling 20 period moving average (for an aggressive buy) or makes a higher high and higher low (for a conservative buy).

Nevertheless, the lesson Apple teaches newer traders is that price can fall harder, faster, and lower than expected – and no stock (not even wonderful Apple) is immune from shocking the masses and going lower despite cries from traders that “It just can’t get any lower!” It always can!

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