Sunday, September 29, 2013 (5:30 pm)
We wanted to provide an updated outlook for both Apple and the broader markets. While our medium-term outlook remains fully in tact, we’re seeing a number of conflicting signals in the near-term.
APPLE: A REPEAT OF 2011? As we reviewed our charts, we came across a very similar price and technical pattern to the current price action. Look at the July-Sept time frame in 2011 versus 2013 below:
Let’s take a look at the similarities. The numbers refer to the points on the price chart within the purple boxes, while the letters refer to the RSI/MACD technical indicators.
- The bottom. Negative 5-10 MACD (a) and 25-30 RSI (A);
- Consolidation at 50 DMA;
- Consolidation at previous 6-month high price;
- Sharp rally to high price. 15-20 MACD (b) and 80-85 RSI (B);
- Sharp pullback to near 50 DMA and Point 3. 40 RSI (C);
- Rebound, which forms on a gap up. 55 RSI (D).
Now that we’ve looked at all the similarities between the two time periods… where do we go from here? Let’s look back to 2011. After the shares performed in an extremely similar manner to the current price action, the shares dropped to create a double bottom at the 50 DMA. In the current case, there is a lot of support in the $474-$476 range, with the 50 DMA, 10 DMA and long-term trend line all within that $2 range. Below that price, additional strong support rests at $465. After an initial drop, the shares saw a strong rally over the ensuing four weeks to create a new high print.
Conclusion: While the near-term presents some uncertainty, this is additional evidence pointing toward our longer-term bullish outlook for the shares.
APPLE: DESCENDING TRIANGLE. If there is near-term downside, it will likely come in the form of a breakdown from the descending triangle below. The 100% measured move is roughly $15 with a target near $465 – right at the point of very significant support that has formed with multiple touches over the past 10 months.
The real disappointing aspect of this potential would be the invalidation of the island bottom reversal. The island reversal is a very bullish longer-term pattern if it remains in effect. It’s important to note here, though, that while descending triangles typically have a bearish tilt, all triangle formations (ascending, symmetrical, descending) are known as continuation patterns. Continuation, in this case, would be to the upside. On the other hand, this $465 target does seem to fit fairly well with the July-Aug 2011 comparison above.
Conclusion: The descending triangle, while technically bearish in bias, can also be viewed as a bullish continuation pattern. No real conclusion – we need to see which way it breaks.
APPLE: BULL FLAG. Another viewpoint of the current price action, looked at from the lens of a longer time frame, is that this could very well be a bull flag in the forming. A bull flag takes place after a significant rally, when the shares consolidate downward for a period of time before resuming their bullish climb. It is typically combined with declining volume throughout the pattern. We’re seeing that exact situation here: a downward consolidation after a strong rally that is taking place with dramatically declining volume. Furthermore, the MACD just turned bullish (which we’ll discuss more below).
Conclusion: The clear-cut bull flag on declining volume, in combination with the bullish MACD is a very bullish sign for near-term price action.
APPLE: MACD TURNING BULLISH. Apple’s MACD has begun to turn up in the daily chart. We’ve indicated those instances in the past where the MACD has very clearly turned up (bullish) or down (bearish). We did not include those cases where it didn’t make a strong move. The MACD has been a fairly reliable indicator over the past year as to the near- to intermediate-term price action. Most of the buy signals (blue) have led to 50+ rallies in a short amount of time. Similarly, the sell signals (red) typically led to fairly strong pullbacks. This is an important one to keep an eye on.
Conclusion: Combined with the other technical indicators discussed, this is a bullish signal.
APPLE: DOUBLE BOTTOM BREAKOUT. Don’t lose track of this chart. The price action, in the intermediate-term should be viewed as bullish as long as Apple holds the $465 price level (double bottom breakout point).
Conclusion: The $465 price point is clearly important here. Even if the shares break down from the descending triangle described above and hit the $465 trend line, we believe that price level will hold. While the near-term is cloudy, again, the longer-term should be viewed as bullish. If the bull flag scenario comes through to fruition, we believe the $515 level will be a magnet. If that level is exceed, $545 should likely come next before or around October earnings.
APPLE: CUP & HANDLE. As discussed last week, shares of Apple have created a much larger pattern known as the cup and handle. If Apple can take out the $515 level, the 100% measured move of this pattern is $640, which happens to be the high set last February and again re-tested (after the all-time high was put in) before last October’s earnings announcement.
Conclusion: To remain valid, the price should remain above the $465 level, and relatively quickly retrace back to the $515 neckline.
FINAL APPLE CONCLUSIONS. In the near-term (days and next couple of weeks), there are two factors working against Apple. One is the descending triangle and the other is the comparison to 2011. Both point to a test of the $465-$470 level (which, don’t forget, is only $10-$15 below the current price). However, it’s important to look at the contradictory bullish indicators. The bull flag with declining volume, the bullish turn in MACD, the triangle (yes it’s descending, but all triangles are continuation patterns), and the double bottom breakout. The path of least resistance, in our view, is up in the near-term.
In the longer-term, we have very high expectations that shares of Apple will provide strong returns due to the much larger chart patterns: double bottom breakout, which formed over five months, and the cup and handle, which formed over ten months.
SPY: SIGNIFICANT DIVERGENCE. As we mentioned last week, the SPY has formed significant negative divergence with BPSPX (the bullish percent index). It created a three-push pattern, with each successive high price occurring on a lower high in the BPSPX. We also saw the third push up occur on an extremely overbought NYMO. The last time we saw this formation was in July 2011. We saw a 25 point drop in the SPY within the next month.
SPY: SUPPORT & RESISTANCE. SPY has strong support at the $167.50 level, which coincides with the 50 DMA. We fully expect a test of this level in the coming days. The SPY has also formed a head and shoulders pattern. A strong break below the $169 support line equates to a breakdown in the H&S pattern, which has a $3.50 100% measured move target of $165.50.
The last time we posted this chart, the SPY was testing the $169 support level. We provided an expectation (blue dotted lines) that had the SPY re-testing the $170.25 level before pulling back to our near-term target of $167.50. That has come to fruition thus far.
INDU: NEGATIVE DIVERGENCE. The Dow Jones has also created negative divergence with its MACD. Below, you can see the last three times we’ve seen significant negative divergence, which lasted many months. Each led to a significant pullback in the markets. This is additional evidence that the broader market is setting up for a pullback this fall.
VIX: THE BOUNCE, AS EXPECTED. As we projected last week, the VIX bounced off its long-term support line. There is no clear direction in the VIX from here.
FINAL MARKET CONCLUSIONS. Taken as a whole, we expect a significant decline in the markets to take place in October or November. With the Fed continuing with its $85 billion monthly asset purchase, against all expectations, we expect the market to begin rationalizing this decision. The economy is in a weak state – weak enough that the Fed is unwilling to back off (even slightly) from its massive asset purchases. It’s interesting that all of these technical indicators are flashing “potential crash ahead” just as the government is set for a shutdown AND may be unable to avoid a national debt “default” (while it wouldn’t technically be a real default, in this market perception is reality).
Now, doesn’t this conflict with our outlook on Apple? While – we’ll be honest – it is hard to fathom the largest stock in the world could swim upstream while the market experiences a correction, we have seen the opposite occur for most of the year. With the stock at an extremely low PE multiple (almost half that of the broader markets – 12x vs 19x), we believe the downside is extremely limited, and investors may actually re-allocate capital from the broader markets to the name. It’s large cash position, low valuation and upcoming EPS resurgence will make this stock outperform during any correction.