Apple spent most of last year building a large, bearish head and shoulders topping pattern as you can see in the weekly chart. The left shoulder peaked in April and the head formed in September when the high of 705.07 was made. The right shoulder is clear from the peak in early December and being a lower shoulder than the left, has further bearish implications for the stock.
The neck line at 497/496 was pierced in spectacular fashion on Thursday’s opening when the stock gapped lower at 460 after Wednesday’s close at 514 and fell further on Friday to a low of 435. The close near the low of the week inspires no confidence as we start a new week.
A very strong up trend started in March 2009 at the low of 82.33 and this very solid trend line has supported the stock price on at least 2 occasions in 2010 and at least 2 occasions again in 2011 before the price accelerated to the upside in 2012. This trend line at 471 was broken last week for the first time since the rally start back in March 2009. In addition, the 100-week moving average at 479 was broken and we closed the week well below both of these supports.
Are there any further bearish implications in the charts? We look for evidence in the daily chart. The 100-day moving average crossed above the 200-day moving average in the second week of June 2009 and held above to confirm the bull trend for three-and-a-half years, right up until this week. The 100-day moving average has now crossed below the 200-day moving average which confirms that the longer term trend is now down.
Another point worth noting is that in on the 25th January 2012 Apple began a very swift acceleration of the bull trend which led to the forming of the right shoulder in the bearish pattern. A bullish break away gap signalled the start of this move when the stock gapped from the close on 24th January at 419.55 to the open on 25th January at 454.44. We now have what could be a bearish break away gap, to the downside from Thursday’s open.
So what next? If bulls are lucky, this is not a break away gap and the price will climb back towards the neck line of the head and shoulders pattern in the 497/498 area this week. This could be an opportunity to exit the stock with the level likely to act as very tough resistance and a slim chance of a recovery through here. However, what looks more likely is a break below the 2011 high of 426.70 and a close of that bullish break away gap from one year ago at 425.10.
This could be a signal that the price is heading towards the monthly 50% Fibonacci target at 393.70. We had a few monthly highs just above this support in 2011, in November at 409.33, July at 404.50 and August at 399.50. So we would hope that the 409/394 area will offer strong support at this stage of the bear trend and attract buying interest.
However, the longer term target for this stock according to the head and shoulders pattern and Fibonacci retracements is likely to be 320 and could be seen before the end of this year.
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