Apple: Missing What’s Right In Front of Us

December 27, 2012 (11:30 am)

You know that feeling when you’re looking for something that’s sitting right in front of you? Or when your sunglasses are sitting on your head, and you start opening drawers and cases looking for them? Damnit! You feel your head and realize how much time you wasted looking everywhere except the first place you should have looked.

Well, that’s sort of what investing in Apple has felt like for the past three months. You see a pattern forming, time and time again, that continues to fail. You shift to other indicators and they fail too, after looking rock solid. Then BAM! There it is. It was sitting in front of you all along. I was actually commenting on it repeatedly, but hadn’t looked much further. Here’s what I mean.

Apple Trend Lines

Do you see that blue line on the chart above, with a slew of arrows (those arrows indicate areas where the trend line has been resistance or support in the past, by the way). It’s as clear as day. That’s a trend line that anybody with two eyes could see. And it has lasted for this entire sell-off.

Now, that trend line is pretty clearly the top trend line of some pattern. I was simply looking at it in terms of support and resistance. Meaning that I was eyeing that line, with the expectation that breaking to the upside could end this correction. But I missed something. To be honest, that “something” wasn’t even there until last Monday. But it’s clear now – almost obvious if you’re looking for it.

What I was missing was the bottom trend line. When you include that, this entire correction looks like one gigantic falling wedge. That’s an extremely bullish pattern.

The Falling Wedge

AAPL Falling Wedge

We had a low at $505 on November 16, before creating a new low last Monday at $501. Those two points form the bottom trend line. The top trend line is significantly steeper than the bottom trend line. That means we’re seeing extreme compression of the pattern, and it’s nearing its end.

There are two ways this could go. The first is to just see a breakout of the top trend line. If that breakout holds – unlike the previous one – we could be off to the races. But that’s not necessarily what I want to see. The other option would be to see another test of the bottom trend line at $499. That would make an absolutely clear-cut falling wedge that no technician or fund manager could ignore. An upside break out from there would mean a definite end to this correction. The timing actually makes a lot of sense too. We’ll likely see a breakout of this wedge – either before or after testing the bottom trend line for a third time – in early January. This aligns perfectly with a rally into earnings, and strong continuation of that rally after earnings.

Double Bottom

With this in mind, let’s add in another layer. The chart below looks complicated, but take each colored pattern separately. You’ll see the falling wedge in green below, with the associated arrows we laid out above. Now, once you’re comfortable looking at that pattern, let’s add in the double bottom reversal (purple) that we’ve discussed previously. It actually fits pretty well with our new thesis. A breakout from the falling wedge will spark a serious rally. The same goes for the double bottom (W) reversal pattern.

W Reversal

We also kept the orange trend line in there. It’s an important trend line dating back to the start of 2012. It wouldn’t be surprising to see the shares test that trend line near the end of its 1Q 2013 rally. Coincidentally, this also aligns well with the long-term rising channel that shares of Apple have formed since 2009.

AAPL Rising Channel

For the rest of the week, we’ll focus on intermediate- and longer-term patterns on shares of Apple. The low volume this week, combined with the many unknowns associated with American politics makes the short-term very challenging. More to come on the broader markets shortly.