Apple AAPL Slides Sharply on Downgrade

Sep 29, 2008: 10:51 AM CST

One underlining headline you might miss today in the media’s focus on the Bail-Out Bill is the fact that Apple Inc (AAPL) was downgraded by RBC and Morgan Stanley – Apple’s share price declined over 15% in early trading on Monday.

The reports that RBC Capital downgraded Apple Inc from “Outperform” to “Sector Perform” and set a price target of $140 and cited that Apple is not recession proof and there’s more risk to the ‘growth’ story in the company.

Also, Morgan Stanley downgraded Apple Inc. from “Overweight” to “Equal-Weight” on concerns that iPhone sales and computer sales in the general retail sector will be weak going forward.

What does this look like on the charts?

Let’s start with the Weekly Structure:

The picture has clearly turned more bearish on this stock due to two factors:

Price has made new lows for 2008, breaking the weekly major support from the prior swing low at $120 per share – this is significant because it confirms an official downtrend on the weekly chart – having made a new swing low, lower swing high, and then taking out that swing low for confirmation.

Volume also is showing a bearish structure, with the recent rally occurring on lower volume (trending down – red arrow) but the recent sharp downswing from $170 to $110 has occurred on higher relative volume and has broken the downtrending arrow to the upside on the volume trend.

Now’s probably not an opportune time to ‘get short immediately’ because price has moved quite a bit in the recent downswing and is likely due for a countertrend rally (upwards) which would find resistance about the $150 level (due to the moving averages).  Should price retrace that high, that level would be the opportune short-sell entry.

AAPL on the Daily Structure:

The Daily chart represents the recent ‘price plunge’ or impulse move clearly.  The daily chart ha been in a confirmed downtrend since June, having made lower lows and lower highs and violating its moving averages to the downside.

The August rally did break the moving averages but failed to make a higher swing high (and was preceded by a lower swing low).

I had expectations that the $170 price would hold, thinking the strong price swing would form a possible ‘measured move’ or bull-flag pattern, and that the moving average confluence zone would be sufficient to hold price – and it did for about a week, but price cleanly broke this zone, stopping out any trades that were taken as price emerged into a sharp and persistent down-impulse move into the new lows of 2008.

This was a lesson how even good set-ups can fail (bearing in mind the set-up was a counter-trend entry at the time) and how stop-losses should always be used because you never know how far or how fast a stock may fall, yes even amazing stocks like Apple.

Price made a new momentum low in late September, formed a quick retracement, and then today has fulfilled the ‘new price low yet to come’ hinted by the prior momentum low.

Odds are good that we’ll get some sort of upwards retracement, but it will be just that – a counter-trend retracement rally – so the upside gains may be muted and resistance may come in about the $130 to $140 per share zone on the daily chart.  Breaking above this, the $150 zone would likely prove too much resistance – but we’ll see how Apple trades in the coming days and weeks for additional clues.

Note:  The Fibonacci Retracement levels from the August high to the September low (intraday – if it holds) are the following:

38.2%:  $134.50
50.0%:  $143.25
61.8%:  $152.05

These levels would also provide possible resistance IF the intraday lows of September 29th hold.  If not, we’ll need to re-draw the current Fibonacci retracement grid.

Note 2:  Google (GOOG) and Research in Motion (RIMM) are also making new 2008 lows.  RIMM was sharply punished last week with an overnight gap from roughly $100 to $75 last Thursday – price is now trading at $65 per share.

The MarketClub commentary by Adam Hewison and website does a great job of following these stocks and many others so check them out and consider joining them if you have not done so already.

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