Apple’s False Breakdown

January 16, 2013 (12:30 pm)

We posted an important Apple chart on Monday. It showed that the move to $497 validated the falling wedge that we’ve been watching closely over the four-month correction. Yesterday’s sharp drop forced shares well below the lower trend line. What does that mean? Is the pattern now invalid? No – this breakdown simply comes with the territory when trading. False movements (whether they be breakouts to the upside or breakdowns to the downside) are accumulation patterns. It’s a way for market makers and “smart” money to accumulate positions by taking out the stops before showing their hand.

AAPL Falling Wedge Update

So in a way, the breakdown yesterday was actually a bullish signal. The fact that we reclaimed the falling wedge today, after only a one day breakdown of a four-month pattern, is like a poker player’s “tell”. We expect consolidation here near the $500 level into the weekend, which would allow the maximum amount of January 2013 calls and puts to expire worthless, before seeing a run into and following Apple’s earnings announcement next Wednesday.

Trend Lines

We’ve looked at the following chart a number of times. We find it very important when looking at trends. We broke the blue trend line for the first time in 2013 yesterday. Today, we firmly reclaimed that trend line. It’s interesting to note that the RSI yesterday hit that all important 17 RSI level (green horizontal line). Each touch of that RSI level has resulted in an almost immediate $20+ rally in the shares.

The orange trend line, by the way, represents the top of the enormous falling wedge.

AAPL Trend Lines

Mr. Market Can’t Make Up His Mind

The market is becoming a bit more challenging to decipher. There are conflicting signals generated every day. We are sticking with our bearish viewpoint for the time being, but that is subject to change at any time. Let’s look at where things stand.

Intermediate-Term: The SPY gapped well above its upper Bollinger Band (not shown) for multiple days in a row after the fiscal cliff resolution. It became extremely overbought on the daily chart and the VIX (volatility indicator) plummeted. These all tend to be indications of an intermediate-term topping process. This topping process, we should add, tends to happen over weeks – not days. So we remain bearish on the intermediate term.

Near-Term: This is where it gets tricky. We’ve seen clear negative divergence with the RSI, as the prices climb on decreasing momentum. However, the SPY has also formed a pretty clear ascending triangle. These are typically very bullish patterns. When a stock tests and re-tests a level on multiple occasions, we often see it eventually break through. This triangle pattern is also known as a ‘continuation pattern’ as we usually see them precede a continuation in the previous move.

That said, the low $147-level has proven to be firm resistance thus far. What we could see happen is a brief break above the low-$147 level, bringing the shares into overbought territory, before seeing the reversal that brings our intermediate-term bearish view into play. We’re closely watching these levels.

SPY Ascending Triangle

  • New Reader

    Gotta love Yahoo’s coverage on their homepage today: One article with the headline Apple could fall to $350 and discussing its based “purely on technicals” but a few hours later quoting Tom DeMark and headling a rally to $600.

    I expect a run up to the $520-$540 range prior to the earnings report next week and see the next 4-6 weeks of Apple accelerating in the same direction as the earnings report.

    • Those websites (Yahoo! Finance, CNBC, etc.) just go with whatever they think will get the most views each day. They’re all part of the problem. When the shares are falling, they explain why the company is horrible and you should sell (at the bottom). When the shares are exploding to the upside, they urge you to get in because it’ll never fall (at the top). They’re part of the Wall Street machine whose primary job is to make money for the “smart” money – large institutions, market makers and hedge funds.

      Our outlook hasn’t changed since last week. A close more than a few points away from $500 heading into the weekend would be surprising, given the enormous number of puts below $500 and calls above it. We will likely see a pop heading into earnings next week (since all those shares owned by the institutions/market makers will be un-hedged at that point, they have an incentive to let the shares rise). Expect $650+ by March/early April. Apple hasn’t changed – only its perception to the market has. And once the truth comes out next week, sentiment will shift in a big way.

  • 111111

    Well, I hope so and I too see a run to $600…I have Feb options at $550 so I need some up movement. I only say that so that people understand my bias on this call!