May 15, 2013 (12:00 pm)
Shares of Apple have finally re-tested a previous high. Instead of the typical pattern during the entire eight-month correction of the shares forming lower lows and lower highs, the shares finally rallied enough to re-test a previous high. That is important, and comes at a time when the weekly MACD showed a bullish cross (not seen since last September) and after the shares broke through the 7-month downtrend line.
After some consolidation near that previous high, the shares have turned down. When the stock broke below the 10 DMA ($450.50) yesterday, there seemed to be shock and amazement on CNBC and the Twitter stream about why the stock so quickly dropped another $6+. A slew of traders (including us) had placed stops just under 10 DMA. All of those stops were hit when the shares slid below the moving average, which triggered a high volume of supply.
So far today, we’ve tested the 50 DMA ($432.50). This is an important level to watch. A break below will likely lead to the triggering of another set of stops, which may drive the shares down to the next area of strong support – $420. Or, the shares may find support at the 50 DMA and return to its uptrend.
One technical aspect that may support a bounce off the 50 DMA is the fact that the hourly RSI (relative strength index) is at a level that tends to be a near-term low. See what happens on the chart below in each case of a below 20 RSI.
One aspect that many are watching closely is a potential inverted (upside down) head and shoulders on the daily chart. If the shares test and successfully bounce off the $420 level, we could see a picture perfect reversal pattern. Many traders are watching this, and we expect a significant amount of demand at the $420 level as traders and investors position for that likely reversal pattern to play out. The problem with waiting for enormous patterns like that to play out on stocks that are widely followed is that people may begin to position themselves early in case a bounce takes place a bit higher than expected. That could cause a sort of self-fulfilling prophesy. Whether the shares hold the 50 DMA or head down to the $420 level, we do think there is a fairly high likelihood of this playing out.
In three and a half weeks, Apple will host its 2013 WWDC (Worldwide Developers Conference) in San Francisco. Expectations are very low. Most investors and Apple bloggers expect the typical software updates – which Apple has confirmed – but no hardware unveiling. That’s the likely scenario. (On a side note, if Apple unveils an SDK for the current version of the Apple TV, we expect them to “own” the living room in the next few quarters – something we’ll discuss later on). So expectations are low, but we expect the positive uncertainty to be a big boost to a stock that has had very little reason to rally recently. If the shares can rally back up to, and surpass, the $470 level over the next four to six weeks, we can expect $520 shortly thereafter. Remember, that level would only be a 13x PE – nothing aggressive. It would just mean an end to the extremely bearish sentiment that currently has a hold on the shares.