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Can Apple Regain Its Mojo?

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Apple is a wonderful example of how price, not fundamentals, is the only true leading indicator and can be used to help you get out of the way before disaster strikes.

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Remember in 2012 when the only thing anyone could talk about was Apple (NASDAQ:AAPL)? Remember when its price was approaching $700 and "experts" were calling for $1100?

"Apple Too Cheap, Deserves $1100 Price Tag: Pro" was a much discussed headline.

In 2012, seemingly everyone owned Apple's stock. That, of course, was the problem; in hindsight, it was a very crowded trade.

Wall Street analysts still have an average price target above $600 for Apple. These same analysts had targets approaching $800 at Apple's price peak and following them would have left you with a potential 40% paper loss. Is there a better strategy?

Currently Apple's price is in the mid $400s and well below the "expert" analysts' average price targets (which last I checked was still up at $618 although price hasn't seen that level in over six months). My guess is that it is only a matter of time before those pros continue to chase price lower, ratcheting down those targets back in line with reality.

The Apple Bubble

Even after its extreme decline, Apple still represents around 18% of the S&P Technology Sector (NYSEARCA:XLK) and 13% of the Nasdaq 100 (NASDAQ:QQQ), down from its peak of around 20%. No doubt it still remains very important to the markets and many ETFs. Google (NASDAQ:GOOG), AT&T (NYSE:T), IBM (NYSE:IBM), and Microsoft (NASDAQ:MSFT) make up the remaining five largest companies in the XLK.

Apple is a wonderful example of how price, not fundamentals, is the only true leading indicator and can be used to help you get out of the way before disaster strikes. The best way to follow price is through the charts, and following the charts in Apple warned us of a trend change downward in November.

In a research piece titled "Is Apple's Stock in a Bubble?" written on October 5, 2012, my firm warned (along with the following technical analysis and chart), "Apple is in a decade long uptrend, but if price were to fall below $600, that would be a sign the 4-year uptrend in Apple has changed to negative."



This breakdown occurred the next month in early November after peaking near $700, and there has been no turning back as investors continue for the exits as Apple has fallen another 30% from that $600 price breakdown.

Apple's Head and Shoulders and Breakdown

On March 6, we also published an article that looked at the shorter term chart of Apple, where we warned of the head and shoulders pattern that was playing out.

But we also noticed the strong area of support that was likely to bring in short-term buyers when price was flirting with $420: "There is hope for Apple holders, though, as its price may finally find some support in this $400 price range as buyers from 2011 step back in to support (shown in blue)." The chart that accompanied that analysis is below.



What About Today?

In late 2012, right near its price peak, headlines such as, "Is This the Golden Age of Apple?" and "It's Not Too Late to Get in Apple" could be found everywhere. Although certainly toned down today, similar headlines still continue concerning Apple's stock. Here are just a few from this week.

"Apple, Favorite Tech Stock of Asset Managers"

"Could Apple Take More of Samsung's Money"

"Apple: Major Concerns Overstated and More Than Priced In"

Although price has fallen 40% from its highs, sentiment toward Apple still is bullish, as shown by a glance at major headlines concerning the company. This is not what you would expect to see after a stock has already fallen 40%.

From a contrarian standpoint, sentiment would need to turn bearish on Apple before any sustainable bottom is likely reached.

On March 24, we provided the below chart along with commentary, key price levels, and trade setups with the warning, "After bottoming at the red trend channel support line in late January and then again at the 2011 support zone in March (shown in blue), Apple has caught a bid and is very near its trend channel resistance (shown by the blue down arrow). It is expected that this resistance will hold and Apple will resume its downtrend farther into the blue support zone where its head and shoulders target resides."

Apple is already down over 6% since that analysis was published a week ago.



Not only is the public still holding onto their bullish slant toward Apple even after a 40% price decline, but Apple's chart continues to follow the bearish script for its head and shoulders topping pattern. When sentiment and technicals combine, the outcome can be extreme, which we are currently seeing with Apple's rapid price deflation.

Its head and shoulders pattern is a big warning sign that the Nasdaq (NASDAQ:QQQ) and other equity markets such as the S&P 500 (NYSEARCA:SSO), Dow Industrials (NYSEARCA:DOG), and Russell 2000 (NYSEARCA:IWM) could also be setting up to follow it to the downside.

The good news is there are specific price levels that will tell us if Apple's head and shoulders pattern is complete and the trend has turned back up. These levels allowed us to call Apple's March bounce as well as the resumption of its downtrend more recently. The charts have helped us get out of the way of Apple's decline even as most "expert" analysts remain bullish and hold onto a 40% and potentially greater loss.

Editor's note: This story by Chad Karnes, CMT, originally appeared on ETFguide.com.

To read more from ETFguide, see:

Are Precious Metals Due for a Rebound?

Has the Trend Turned Negative for Municipal Bonds?

Do Earnings Misses Matter Anymore?
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