November 3, 2013 (3:00 pm)
On October 26, we suggested staying out of Apple heading into earnings. After an initial pop to $540, the shares have since slid to the $515 level and closed Friday at $520. We anticipate more downside ahead. While it’s difficult to largely stay out of our favorite name – especially given the number of potential bullish catalysts ahead – we learned a hard lesson in September 2012 not trusting the technical analysis. Several well-respected technicians were calling for a top, but we were too busy focused on the iPhone 5 introduction, new iPads, the Holiday selling season and the bullish seasonality. We’ve learned a lot since then…
Very Long-Term Trend Line. Shares of Apple found resistance – not surprisingly – right at the extremely significant trend line that has formed since the 2008 bottom. The trend line is currently sitting at $540, which just happened to be the highest price the shares traded after earnings before retreating.
Cluster of Resistance near $540. Along with the long-term trend line acting as firm resistance at $540, you’ll see two additional indicators with a resistance level right around that $540 level. The first is the double bottom target of $545 (which is an approximate target, based on the $80 measured move). The second is the Fibonacci retracement level, shown on the right side of the chart below. Chartists tend to look at Fibonacci retracements levels, which are 38.2%, 50%, 61.8% and 100%. After a significant rally or correction, we tend to see the shares retrace either 38.2% or 50% of the previous move before finding support/resistance. As you can see below, the $540 level represents a 50% retracement of the $705-$385 year-long correction in Apple. Resistance at that level should not be unexpected.
Negative Divergence. The pullback this week has confirmed negative divergence. The chart below illustrates the previous instances of strong negative divergence with both RSI and MACD. Negative divergence occurs when prices continue to rise as the technical indicators (RSI and MACD in this case) continue lower. It’s a signal that momentum has weakened. Of the four previous instances since 2011, each ended with a pullback that reached or exceeded the 50 DMA within a few days. Much of our Twitter stream believes it is unreasonable to expect a pullback in Apple shares, due to the number of potential bullish catalysts in front of the company. But why put money on this time being different than every historical reference we have? While retail investors are debating which catalyst is most bullish and will drive the shares to the all-time high’s, we’re firmly focusing on the technicals for the time being. One of the most often repeated lines in investing is “this time is NOT different.” Why bet otherwise?
Rounding Bottom. Of course, that’s not to say that we’re bearish on Apple in the medium-term. In fact, just the opposite is true. It’s our expectation that after a near-term pullback (due to the cluster of resistances aligning at the $540 level, negative divergence and falling MACD), the shares will likely see an explosion higher in the coming months.
Peter Ghostine (@PeterGhostine) posted a chart on Friday, which we modeled our chart below after. Not only is a good-looking chart, but it also aligns pretty closely with our longer-term expectations. (1) Apple sees a near-term pullback to the bottom trend line of the blue wedge, before bouncing to test the top trend line (right near the $555 level, which is a previous point of support/resistance for shares). (2) Apple consolidates back down to the $540 resistance cluster level, where it finds support, and subsequently breaks out heading into January earnings.
Comparison to 2011. We’ve discussed this one multiple times, but enjoy following up on patterns that seem to have predictive factors. After Point (7) on the chart, both cases in 2011 and 2013 saw a consolidation $20 below the recent high. In 2011, there was a very quick pullback that tested and exceeded the 50 DMA. Based on the other charts we’ve been watching, we anticipate a similar reaction here. Interestingly, the 50 DMA sits right at the same level we expect to find support from our rounding bottom/wedge analysis above. After that, based on the comparison to 2011, we’d expect to trade in the $490-$540 range for a month or so before riding a monster rally into Spring 2014. Again, very similar to the analysis above.
Expectations Align Across Multiple Charts and Time Frames. It’s foolish to think that we can predict the future… we can’t. But based on a number of differing charts, technical indicators and patterns across multiple time frames, we have formed a number of expectations that all seem to cross align with each other.
While there are, indeed, a number of extremely bullish catalysts that we could point to in order to call for a huge and immediate rally in Apple, the technical analysis suggests otherwise. This time, we have a China Mobile deal, potential new product category(s), potentially massive iPhone/iPad sales, larger buybacks, etc. But don’t forget that shares have risen $155 trough to peak in just over three months. Who’s to say how much of that is priced in? Don’t forget the lessons learned during the September 2012 time frame, where we could point to very similar bullish catalysts. However, in that case, the technicals won out.