(AAPL) was the leader the last quarter, so let's take a look at the big picture.
AAPL is flirting with a major inflection point. There are a cluster of trendlines that define its current position.
A rising trendline drawn from the January 2009 price low at 78 (that was fractionally lower than the November 2008 low at 79) connected to the last monthly pivot low ties to the 644 April high (red trendline D).
Likewise, a rising trendline connecting pivot highs since 2010 also ties to around 644 (blue trendline C).
In addition, a trendline connecting the top of the December 2007 high at 203 to this year's previous 644 April high ties to September's 705 high (red trendline B).
Note how trendlines C and D converge with the horizontal line which is the prior 644 high.
There is also a measured move up on the monthlies from the last ditch 9-month run from April 2007 to December 2007 and the recent 9 month run into the September peak.
Below is a Square of 9 Chart on AAPL from last week's Square of 9 webcast.
Click to enlarge
It may be that a lot of put buying and hedging is being done in AAPL prior to the upcoming earnings report as the end of October coincides with the fiscal year-end for many large mutual funds and this could be putting pressure on AAPL. But it could be liquidation.
AAPL is in the area where a solid bounce could play out, underpinning the stock market. This is underscored by the confluence of angular and horizontal support and also by the fact that AAPL is testing 180 degrees down from the high and its 50 day moving average.
Support at current levels could carve out a 3-point trendline on the monthly chart on the big trendline up from the low (D). That said, a break below 650 and then 644 implies a test of 270 degrees down, which comes in at 627 or 360 degrees down at 603.
Interestingly, a 360-degree pullback to 603-ish ties to the last breakout pivot from the beginning of August.
AAPL closed below its 50 dma on Friday on the important weekly closing basis so the action to kick off this week will be critical.
It is worth pointing out that AAPL gapped down below its 50 dma in late July but there was no downside follow-through and AAPL quickly recaptured its 50. Follow-through is key.
I think we need to pay attention if AAPL heads lower to begin the week and reverses with authority to regain its 50 dma.
Downside pressure to begin the week could test/flush 644 where many long-term stops in the stock are likely clustered, assuming long-term lovers and holders of AAPL stock (as distinct from its products) have not been disabused of the notion of using a stop. Or has Apple reversed the law of physics and repealed the law of gravity? Can AAPL pull a Newton?
As the monthly AAPL chart above shows, even during the Flash Crash of 2010, prior resistance (the December 203 high) acted as new support. Who said the algorithms and flash crashes have no (historic) sense?
I can't help but wonder if 644 is definitively violated, that AAPL is not on a trajectory down into November, where November 1 squares the recent 705 high and is 90 degrees from the major pivot low in early August 2012.
The price that ties to November 1 is 627 which as noted above is 270 degrees off the high.
This ties closely to 622, which vibrates off the important November 21, 2008 crash low at 79 in AAPL.
Notable is that the last run for the roses in AAPL began on a Gap & Go on August 13 from a shelf at 622.
So there is some good vibration with the current 'squares' and time/price harmonics calculated above.
Checking a weekly AAPL shows a measured move as well: from last year's October low at 363, AAPL ran up 19 weeks to the April high. Following a 6-week correction into May with a reversal on the SEVENTH week, AAPL ran up 18 weeks into the recent late September top.
The bottom line is that AAPL shows a potentially constructive weekly Plus One/Minus Two buy set up. Trade below last week's low will turn the important 3 Week Chart down. So this week's behavior in the stock that led the market last quarter will be critical to observe as it approaches a test of its prior swing high on a turn down of its 3 Week Chart. If AAPL continues lower following a turn down of its 3 Week Chart, it is a sign of the bear.
Drilling down to the hourlies shows AAPL has more than satisfied an hourly Head & Shoulders topping pattern.
At the same time if the trend is lower, AAPL shows what may be a potentially bearish Inverted Cup & Handle. Continuation projects a move to around 635.
AAPL has been the leader. A break of prior resistance (644) calls the trend into question. This is important as AAPL underpins the market not just as a weight in the NDX
with all the major funds loaded to the gills, but also is a psychological heavyweight.
Not only is it important to distinguish between the stock market and the economy but also between a company and its stock. Remember that RIMM
topped in June 2008, while its earnings continued to increase until March 2011, albeit this was during a bear market.
RIMM became a value, then a trap.
I am not saying AAPL will become RIMM. I'm just saying with AAPL's earnings coming up, it is worth remembering that stocks can top well ahead of their earnings.
RIMM looked invincible shrugging off the bear market in the first half of 2008. Then came the monthly signal reversal bar in June 2008, an outside down month which also left a monthly Soup Nazi sell signal on a test failure and stab back through the prior high roughly 6 months earlier in November 2007.
So with AAPL 6 months from its prior April peak, caution is warranted on an authoritative break of 644.
The Trouble With Fundamentals
Every analyst is recommending AAPL. If a P/E for next year on continuing growth is 14-15 and earnings are $70 per share, then the stock should be $1000, right?
This reasoning is why most fund managers don't beat the market. They are programmed into believing the hypothesis that great earnings are driving Apple's stock higher and higher and as long as the earnings improve it can only go up.
However, that is not what is taking AAPL higher. What is taking the stock higher is the buying by large institutions. They have cornered the float after many years. They have been riding this gravy train and squeezing it for all its worth. Literally.
Arguably, one could say they are buying BECAUSE of earnings, but what happens when there comes a time where every institution has not just a slice of AAPL but a chunk, and it represents too big a weight in their overall portfolio because its price has kept going up relative to other names?
Is it possible that liquidation can blind side these institutions while earnings remain robust?
The higher the parabolic advance of the huge capitalization growth, the more likely an implosion becomes: it takes an ever-growing amount of money to hold up an expensive stock. Once the point of equilibrium and saturation is reached, all the earnings in the world can't hold up a stock. Newer investors start to lose and downside picks up as volume feeds on itself and momentum explodes.
While the hypothesis of earnings works well when a stock is going higher and higher. When the stock starts coming down and earnings are still 'there', it can create a lot of fear and paralysis as market participants theories are undermined. There is uncertainty and investors hate uncertainty. They begin to wonder if the price of the stock is anticipating something they don't know about the fundamentals and whether the 'smart money' knows something they don't.
In reality, once equilibrium is reached, selling can beget more selling as a virtuous circle becomes a potentially vicious circle and an American beauty becomes an American thorn in the market.
No positions in stocks mentioned.