An August Breakout and Trend Reversal for Apple AAPL

Aug 14, 2013: 10:14 AM CST

After spending months consolidating with a “Rounded Reversal” basing pattern, Apple (AAPL) shares powerfully broke a critical resistance level which triggered an official trend reversal signal.

Let’s view the chart from the top-down, starting with the Weekly Chart:

AAPL Apple Breakout Trend Reversal Weekly Chart

In my prior August update for Apple (Apple Trades into Overlapping Resistance Target), I highlighted the confluence into the $475 area as the critical game-planning price level for an inflection.

The breakthrough above that level resulted in a sudden up-surge toward the current $500 level and may continue to extend higher, as discussed in the prior post and in the Fibonacci Retracement grid shown below.

The key factors on the Weekly Chart are the lengthy positive momentum divergence into the $400 per share level (also seen clearly on the Daily Chart) and the up-surge that has taken price above the $450 and $475 key levels beyond the upper weekly Bollinger and – more importantly – the falling (now flat) 50 week Exponential Moving Average (EMA).

As we saw with the mid-2012 lengthy negative momentum divergences, weekly chart divergences can signal trend reversals in advance.

Let’s step down to the Daily Chart for updated level planning:

AAPL Apple Stock Chart Breakout and Trend Reversal on Daily Chart Timeframe

As I highlighted in the prior post, Apple shares faced a critical resistance challenge into the $475 level.

A 5-day retracement took price back to the rising 20 day EMA which set-up the current rally and recent breakthrough above the key 200 day Simple Moving Average (SMA).

While there’s more complex methods to determine a trend reversal, some traders or investors use the simple metric “IF price is above the 200 day SMA, THEN the price is in an uptrend.”

The break and close above the 200d SMA meets this simple criterion for trend reversal and may lead to additional money flow into the stock for that reason alone (not to mention the headlines and buzz generated by a strong rally in Apple).

Using the “Pure Price Method,” price formed a slightly higher low into July which was met with a higher high on the recent breakout beyond $475 which sets in motion an uptrend (which is a series of higher highs and higher lows – a reversal of the previous downtrend of lower lows and lower highs).

Looking beyond price, we can see the highlighted green spikes in volume which suggests buyers are becoming more aggressive and volume is expanding on the rallies or up-swings in price – another key precursor to trend reversals.

The bottom line is that as long as Apple shares can remain above the 200 day SMA (roughly $475) and preferably above the $500 per share level, the greater the odds of additional upside price action yet to come both from buyers (including investors) stepping back into the stock and short-sellers (traders) stepping out of the stock (short-squeeze).

For short-term traders, let’s end with a Daily Chart Fibonacci Retracement grid for possible upside targets:

Apple AAPL Fibonacci Retracement on Trend Reversal Daily Chart

A quick Fibonacci Retracement grid from the September 2012 high to the April 2013 low reveals the current key inflection point – or target – into the 38.2% retracement near $508 per share.

Any further breakthrough or price strength above $508 and $510 suggests that shares could continue the new uptrend toward the $545 and $550 upside targets (the half-way point of the decline or 50% retracement) and beyond toward $583 then $600.

Just like price had to clear the recent confluence resistance target into $475, Apple has to clear above these chart-based targets – each breakthrough will likely generate more attention, more buy orders, and more short-covering orders as is the case of breakouts above key inflection or resistance levels.

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Corey Rosenbloom, CMT
Afraid to Trade.com

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Corey’s new book The Complete Trading Course (Wiley Finance) is now available along with the newly released Profiting from the Life Cycle of a Stock Trend presentation (also from Wiley).

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