January 23, 2013 (12:00 pm)
Apple’s January earnings will finally be out in just four and a half short hours. Are the shares setting up for a blowout? Here’s what the charts are telling us.
The Falling Wedge: As we’ve mentioned on numerous occasions, Apple has formed an enormous falling wedge over the last four months. Each significant rally since the start of the correction has ended right at that top trend line. And each subsequent lower low has formed a well-defined lower trend line. The bottom trend line was temporarily breached, creating what’s known as a “false breakdown”. It’s happens quite often. The bears get one last shot at trying to break the pattern down, before the bulls get to make their move. We were hoping to be resting right at that top trend line as we head into earnings, but that’s probably too much to ask of the market. This afternoon, we’ll know whether this pattern will break out. It has a target move of roughly $200 (likely to take place over the next 3-4 months).
Significant Trend Lines and Resistance: We’ve laid out two important trend lines (orange and blue; the purple is not relevant at this time) Apple has faced throughout this correction. The orange trend line coincides with the top of the falling wedge. We’ve also included blue horizontal lines where we expect the shares to see moderate support/resistance going forward.
Long-Term Divergences: It’s important to note that multi-week RSI and Chi-Osc divergence formed just before a significant change in trend. During the end of the March/April and the August/September rallies, we saw negative divergence. This happens when the shares make a higher high, but the technical indicators (in this case, RSI and Chi-Osc) fail to make higher highs. It’s a signal that momentum is dying down and tends to precede changes in trend.
As it happens, we’ve seen just the opposite take place over the past eight weeks. Both RSI and Chi-Osc have formed higher lows each time Apple’s shares have formed lower lows. This signals that the momentum of the bears has been deteriorating, and a change in trend to the bulls favor is increasingly likely.
Long-Term Rising Channel: This was our favorite chart to watch up until it broke down in mid-December. We had high hopes in early December that the trend line would hold. It didn’t. We left much of the chart the same, so you could review our previous thoughts on the outcome.
The reason we included it here is this. We believe the breakdown over the past five weeks was simply a reaction (or, more appropriately, an overreaction) to the upside breakout we saw during the August/September rally. We expect the shares to trade back inside this channel in the coming weeks.
Monthly Consolidation Trends: We created this chart late last night as we attempted to find new patterns we hadn’t seen before. This one caught our eye. It seems like every rally since the 2009 low has ended with a 5 month consolidation period. The recent 30% correction was much more extreme than the previous consolidation periods. But that doesn’t necessarily mean the trend has changed. Importantly, each of the consolidation periods took place with decreasing volume, making them look like bull flags. We are excited to review this chart in the coming weeks and months to see whether our hypothesis holds true.
Island Reversals: If the shares continue to trade and end today’s session near the $510 area, we could see an island reversal (more on island reversals here). Assuming the company meets or beats estimates, and we see a gap up tomorrow, it would form a very clear island bottom. For this reason, it’s likely more helpful from a technical point of view for the shares to remain confined today.
Head & Shoulders Set-Up: Since early 2010, the shares have formed three large head and shoulders formations that, in each instance, ended at the long-term rising trend line (dark grey). A rally has preceded each of these cases, and a dramatic rally has followed the last two. While we’ve broken down from the long-term rising trend line, it may prove to be just a small blip. If the shares can rally after earnings, we may see a dramatic rally follow.
The Doji Reversal: Lastly, we’d like to throw out another meaningful pattern. When you see a number of doji patterns back to back, it tends to precede a trend change. It’s a signal that the bulls and bears are have a fierce fight near the end of a trend. We’ve seen a number of back-to-back doji patterns over the past few days.
We’ll be updating our thoughts throughout the day. Please share your thoughts and comments below.