September 23, 2013 (9:30pm)
Apple released blowout first weekend iPhone sales this morning. The shares immediately rallied $30, before closing up $23 on the day. In last night’s post (which you can find immediately below this one), we mentioned that this sales number would determine whether shares of Apple would decline back down to the recent $448 low or bounce back to the $515 level last seen a few weeks ago. Today’s bounce has created a number of extremely bullish price charts.
ISLAND BOTTOM REVERSAL. One of the most well-known gap patterns is the island reversal, which occurs when the price gaps below a specific price range for a number of days and then is confirmed when the price gaps above the original range. This pattern is a strong signal of a top or bottom in a trend, indicating a coming shift in the trend. Apple’s recent trading has created a very well defined island reversal.
The longer-term chart of Apple below identifies other island reversals that have taken place in the past. This pattern has been an extremely reliable indicator. The last two very clear island bottom reversals led into $260 rally in four months and a $155 rally in seven weeks. Now, it’s important to mention that the recent island reversal may not hold. Below the $479 level, the pattern becomes invalidated. As long as the island remains, however, Apple shares appear very bullish.
CUP & HANDLE. This is another extremely bullish price pattern. As its name implies, there are two parts to the pattern: the cup and the handle. The cup, which looks like a rounding bottom, is completed and a trading range develops on the right hand side (forming the handle). A subsequent breakout from the handle signals a continuation of the prior advance.
If shares of Apple are able to exceed the recent high of $515, it can be considered a cup & handle breakout. The measured move is calculated as the right-hand peak of the cup less the bottom of the cup (in Apple’s case, a $130 point move). This implies a $640 price target over the medium-term. Since the pattern has taken 9 months to complete, it may take until the middle of 2014 to complete this pattern. This is another extremely bullish data point for longer-term Apple investors.
DOUBLE-BOTTOM BREAKOUT. We mentioned the double-bottom breakout in last night’s post. Just to reiterate our view, Apple has successfully broken out of the double bottom formation and also successfully re-tested the breakout point (along with the 50/200 DMA’s). It now has room to rally to the price target of $545 over the coming weeks.
INVERSE HEAD & SHOULDERS. Lastly, we also mentioned that Apple shares had formed a potential inverse head and shoulders pattern. With a breakout today, we fully expect the $505 price target to be tested in the coming days. We’ll see whether our expectation comes through to fruition…
ANOTHER BEARISH DATA POINT ON THE BROADER MARKETS
We wanted to include additional evidence which supports our view of an imminent market correction. This may seem to counter our views on Apple, but we have seen many times in the past where Apple and the broader markets become disconnected (see the first half of 2013!). Below, we’ve updated our chart which tracks negative divergence between the Dow Jones Industrial Average and its MACD.
As you can see, when prices rise during periods of falling MACD, it has precipitated a significant decline in the market. We continue to believe we are heading towards a market correction.