Reversals of Reversals

December 11, 2012 (9:00 am)

Apple formed a hollow red candlestick during yesterday’s trading session. What that means is that the shares gapped down at the open, but reversed intra-day to close the session higher than it opened. During a downtrend that’s very indicative of a reversal. It means that, during the trading day, the bulls were more powerful than the bears. A change in trend may be coming.

Interestingly, this hollow red candlestick formed right above significant support at $520. See the chart below. We’ve now attempted to break below that support line 4 times during this correction. The first time, the bears had full control and brought the shares down to $505. That price was firmly rejected, and we saw a subsequent $90 rebound in just six trading days. The past three attempts seem to have been rejected as well. That means that market is saying Apple shares do not deserve such a low valuation. Natural buyers have jumped in each time we test that support.

DOUBLE BOTTOM REVERSALS (Yep – that’s plural)

Shares of Apple may be forming a double bottom reversal here. From $594, we dropped straight down to $518. There was a small rebound to $555, then a re-test of the lows at $520. See the chart below. If we’re able to catch a bid here, the price target of a reversal is $590. On the downside, what you typically see on a re-test is a firm reversal. What we saw yesterday looked like consolidation. That’s OK. It can take a few trading sessions to fully form.

Conveniently, getting back up to $590 forms a much much larger double bottom reversal. This one would span the entire correction. From $705, the shares fell almost vertically to $505 in just 8 weeks. From there, we had a sharp rally to $594. Subsequently, we’ve re-tested the lows at $518. Getting back up to the $590’s in the next week or two puts this pattern into play. The measured move is the top at $594 less the average of the bottom ($505) and the re-test ($518), let’s call it $512. So from $594, the target move would be $82. $676 is the price target of this pattern.

Lastly, I’d like to update the long-term rising channel. Yesterday’s early morning gap down tested the lower trend line yet again. We bounced off and saw an immediate $16 move off the lows before the shares simply consolidated for the rest of the day. That’s very bullish. It indicates that support is holding, and any attempt to push below is fails quickly.

A strong rebound today would be nice. Haven’t had a reason to be optimistic in a while. The whole world seems to hate this stock. But the charts are saying something entirely different.