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Technical Alert: Classical Head and Shoulders Top Forming on Apple

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Expert explains: For the pattern to have import, you need heavier volume on the left shoulder, lighter volume on the head, and even lighter volume on the right shoulder.

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MINYANVILLE ORIGINAL Although I no longer practice the classical technical analysis craft, I have yet to see anyone write about the impending classical head and shoulders top forming on Apple (NASDAQ:AAPL) on the weekly time frame.

Yes, there was talk of it on the daily time frame a couple months back and interesting enough, most scoffed at it. Well, Apple dropped almost 200 points from the highs in a beeline fashion -- far more than was called for by the technical set-up. Now it is forming the same pattern on the intermediate term time frame. Will it mean anything this time around?

Here's a chart of the set-up with some overlays of neoclassical anchored support and resistance concepts. As you can see, anchored resistance isn't all that far away now.

(Charts courtesy of investools.com.)



According to Edwards and Magee who wrote the book on this pattern, volume is an important characteristic and I agree with their analysis in that respect. For the pattern to have import, you need heavier volume on the left shoulder, lighter volume on the head, and even lighter volume on the right shoulder. So far, that's the way it is setting up.

If this pattern does play out, according to the classical analysts, the measure of the move is equal to price difference between the top of the head to the neckline which in this case will end up being about $200. I don't agree with this way of measuring the projective move. My work has shown that utilizing percentage moves is far more valuable.

In the case of Apple, the move off the top to the $505.75 low of a few days back is roughly 28% so the measured move if Apple breaks the neckline would be approximately a 28% loss from somewhere around the $500 or a $140 decline. That would put Apple back to $360 level and, wouldn't you know it, there is some unfinished business way back at those levels as shown here. When Apple broke out at the beginning of 2012, it did so without volume confirmation.



One of the concepts I lean on heavily in my neoclassical approach to measuring supply and demand via the charts is the testing process, for it is through tests that the market provides the clearest indication of its real intentions. A fundamental paradigm of that same approach is that 82% of all suspect bullish trend transitions (those that break swing points without volume confirmation) return to the scene of the crime (the retrace after the breakout) within 6 bars to prove the viability of their breakout. In rare cases this doesn't occur. Those rare cases happen to have some similar characteristics that make them special as detailed in my latest book Trend Trading Set-Ups.

This rarity was true of Apple this year, but as with all stocks, eventually the run comes to an end and the great stock runs eventually become ordinary again. That process on a chart is a transition from a bullish trend on the intermediate term to a sideways one. Apple is attempting to do just that.

The proof is in the pudding, though. To circumvent these thoughts, Apple needs to rise above anchored resistance and remove the potential for a chorus of calls for an intermediate term head and shoulders top. If that doesn't come to pass, I would expect you will see many calls of that nature come forth in the not-too-distant future.

I also expect you will see a general market that cannot lift either since, as of this writing, Apple still accounts for a little more than one-fifth of the entire Nasdaq-100 (INDEXNASDAQ:NDX).

Twitter: @tatoday
No positions in stocks mentioned.
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