Weekly ETF SPY: AAPL at Crossroads

The cat is out of the bag. Everyone knows that AAPL prices are no longer linked to iPhone, iPad or other iGadget sales. To the frustration of Wall Street, AAPL has developed a mind of its own. Here’s one simple trick that foreshadowed all turns since November 2012.

Is Apple’s decline over? Much has been written about Apple’s quick demise from darling of the masses to giant under achiever.

The good news is that AAPL shares recovered a bit recently. The bad news is that further gains are a must to break the down trend. Here’s why:

Charted below is AAPL on a log scale along with RSI (Relative Strength Index) and some powerful support/resistance levels.

Apple’s decline from the September high has been confined to a well-defined parallel trend channel.

Every instance Apple hit that channel is marked with a gray circle. There are six circles, so AAPL must consider this channel to be important.

This week AAPL touched the upper channel line for three consecutive days but has so far failed to break above it.

At the same time, RSI has come back to test resistance at 51, a level that rebuffed all prior rallies since October.

There is a silver lining for AAPL bulls. On the regular (non log scale) chart, AAPL already moved above its parallel channel. Nevertheless, the down trend deserves the benefit of the doubt as long as AAPL fails to bust through price and RSI resistance.

Regardless of your bias, what AAPL reaction to current resistance will likely set the directional trend for the coming weeks. The trend channel can be used to find low-risk entry points and to manage risk.

The other shown support/resistance levels may come into play if AAPL is able to break out if its current ‘resistance prison.’

The lower ascending red trend line goes back to the year 2000. The dashed gray channel goes back to May 2010 and the upper ascending red trend line originates in 2003.

All those long-term support resistance levels have been helpful in anticipating important turns, particularly the all-time high above 700.

The September 12, 2012 Profit Radar Report featured this (at the time outrageous) trade recommendation: “Aggressive investors may short Apple (or buy puts or sell calls) above 700 or with a close below 660.

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Is Apple’s Decline Over?

Wow! Apple, the world’s largest company lost 31.6% of its market capitalization since mid-September. This week’s new price low showed the first real bullish divergence. Is AAPL’s decline over, at least for now?

The shares of the world’s largest company recovered a bit after falling as much as 31.6%. What’s the bigger story, the 31.6% drop or Wednesday’s 4% recovery?

The chart below shows that Wednesday’s low at 483 occurred right around double green trend line support.

This is pretty much in line with the expectation I shared via the December 10, article about Apple here on iSPYETF: “It seems to me that Apple is heading for a new low, perhaps around 480 – 490.”

The same article stated that: “A new low unconfirmed by a new RSI low would create a bullish divergence and possibly prove as a springboard for a more sustainable rally into Q1 2013.”

The new low was carved out against a bullish RSI divergence. Will that be enough to get Apple shares moving higher again?

percentR, the same indicator we used to confirm Apple’s top, has moved from below to above 20. This is considered a bearish low-risk entry. The regular ‘default trade’ is to go short with a stop-loss (based on closing prices) at Wednesday’s high.

However, going short may not be the greatest idea since Apple precisely hit our down side target against a bullish RSI divergence. It may be better to use RSI as an initial change of trend confirmation. A close above 510 would be positive.

Apple Sentiment Gauges

I like looking at sentiment extremes to gain an extra edge. Bullish extremes are bearish for the stock and vice verse. Unfortunately, there are no sentiment extremes for Apple.

The short interest on AAPL is within the normal range (about 2% of outstanding shares) as is the options put/call ratio. Other options measure a closer to optimistic than pessimistic extreme, which is odd considering Apple’s 31% tumble.

Apple Cycles and Seasonality

AAPL has enjoyed a multi-year bull market with average annual gains of 63% since 1998 (the first year of profitability after Steve Job’s return to Apple).

For that reason Apple’s seasonality has a distinct bullish bias. The beginning of the year is generally less bullish for Apple shares, but obviously a 14-year predominantly bullish seasonality chart is little help during this bear market period.

Summary

Sentiment and seasonality don’t provide much of an edge, so we’ll keep technicals in the driver’s seat. Based on the bullish RSI divergence there’s good potential for a bounce. percentR suggests to wait for a close above 510 before going long.

Due to the potential for an upcoming S&P 500 reversal, it will be smart to elevate stop-losses if prices do rally and keep a stop loss no lower than 480 initially.