October 11, 2013 (9:30 am)
AAPL ASCENDING TRIANGLE. After the introduction of the new pair of iPhone’s, Apple shares quickly dropped from the $500 level to $450. It rebounded just as quickly as it fell, and has been consolidating in the $480’s for over two weeks. That consolidation period is beginning to look a lot like an ascending triangle. The shares have now touched the top and bottom trend lines three times each. A breakout from this pattern has a target of $511, right next to its recent high of $513. We believe this consolidation period (whether or not the triangle comes through to fruition) is very bullish for the shares. It’s important to note, however, that the October option expiry (next Friday) has a massive number of $500 call options. Don’t be surprised if the shares run into a brick wall at that $500 level, which we’ve seen happen countless times in the past.
AAPL COMPARISON TO 2011. In our previous post (A Complete Look at Apple and the Markets), we compared the recent price action and technical indicators to an extremely similar pattern in July-Sept 2011. We updated the chart below only slightly. We noticed two more similarities over the last few days: (1) the MACD consolidated for two weeks after reaching point 6 on the price chart, and (2) during the same time frame, the share price consolidated in a slightly rising fashion right along the 50 DMA. Every aspect of these charts is eerily similar, from the RSI to the MACD to the price action and its relation to the moving averages. After the third touch of the 50 DMA during the consolidation period, the shares broke out in a strong move. With strong indications that Apple will host an iPad/Mac/Apple TV event in under two weeks, and earnings coming right afterwards, we believe a strong move up could come very soon. Keep in mind what we mentioned previously about October option expiry next week, though. It may hold back from breaking $500 until after those options expire.
AAPL DOUBLE BOTTOM. Interestingly, the near-term ascending triangle has a target of $511, very near the recent highs of $513. A breach of that recent high brings new highs into the picture, which is further evidenced by the similarity to the July-Sept 2011 price action. Additional evidence of a strong potential for an upside breakout is the double bottom formed through the summer of 2013. It has a price target of $545, which fits in well with our other analyses above.
AAPL CUP & HANDLE. Further, shares of Apple have also formed a Cup & Handle pattern over the course of the year. The recent consolidation has slightly changed the shape of the handle, but has by no means diminished the possibility of this pattern achieving its target. We haven’t provided a fundamental analysis on Apple in quite some time, but based on our recent analysis (which we plan to provide in the coming weeks), we expect that the cup and handle price target of $640 is fully achievable by the middle of next year.
SPY TREND LINES. In our prior post, we provided the chart below. The price acted almost exactly as we had expected, with a re-test of the $170.25 level before dropping to the $167.50 level and consolidating there. These trend lines remain very important to follow. You can see that yesterday’s monster rally began right at the strong support/resistance level of $167.50 and ended on top of the $169 support/resistance level.
SPY WARNING SIGNALS. This is simply one possibility. We’re not forecasting the end of the world, but want to provide the following possibility since it so closely resembles previous price action. In early August 2011, just as Congress and the President were going to battle over rasing the debt ceiling (or lack thereof). After forming a very similar rising channel that included three push’s up, the shares failed to re-test the third high price. This happened after an extremely overbought NYMO on the third push up and, most significantly, occured with negative divergence with BPSPX (the bullish percent of S&P500). When share price increases on decreasing momentum, it’s a strong warning sign.
Based on the previous occurrence, after a quick drop toward the bottom trend line (which equates to the same price action earlier this week), the shares quickly re-traced much of the decline to re-test the highs. Only after a failed re-test of the highs did the shares completely roll over. The worry here is that we’re seeing a carbon copy of the price and technical indicators. Yesterday’s monster rally could very well be a re-test of the highs. If it fails to re-take that high, we could see a dramatic sell-off.
A completely different take on the recent price action, we should point out, is that the small breakdown from the rising wedge pattern we’re in was a “bear trap”. Others who are watching the same pattern as we, got into large short positions as the shares broke down from the pattern. After yesterday’s rally, they’re now “trapped” in their shorts before continuing the year-long rally. So, again… these are both important viewpoints to watch and keep in mind.
VOLATILITY. The last chart we want to provide is the $VIX volatility indicator. As we’ve mentioned many times, the 70 RSI level (red line near the top) indicates an overbought $VIX. This has historically been a nearly perfect time to buy into the market. The indicator hit that 70 RSI on Tuesday, and we got into large SPY and QQQ option positions, which we were able to capitalize on during the huge rally yesterday (although we sold early in the trading session… too early). But our motto continues to guide our investing decisions: “I made all my money by selling too early.”