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Technical Tuesday: Apple. I Still Don't Like It. Here's Why.

 February 13, 2013 02:36 PM

Sure, Apple Inc's stock is a lot more attractive to a long-term investor today than it was last year. 

But the stock has a lot of headwinds to face right now. 

It's oversold.  This is true.  But just as you wouldn't necessarily want to just go out and sell-short an overbought market merely because it's overbought, you wouldn't want to dive into an oversold stock merely because it's oversold.  It can still decline a bit more, and we don't have a solid bottoming formation yet. 

And what if the general market decides to roll over, adding downward pressure to Apple?

We need some sort of confirmation that Apple is gaining strength.  And instead of just looking at the market as "high priced" or "low priced" or "going up" or "going down" or "how much upside or downside potential there is IF WE ARE RIGHT" we need to look at the market in terms of "high probability" or "NOT high probability".  (Forget about thinking about what's "low probability".  It's a waste of time.  Keep your standards high.  It's either high probability or it's not.)

[Related -Sobering Quarter and Guidance for Long-Time Apple Bull]

Apple is oversold, but it's not a high probability bullish winner.  Chances are it won't even be a high probability bullish winner until it's about 90 points (or 20%) higher than today's price -- assuming the bullish reversal starts HERE.  

It may turn into a high probability winner at a LOWER price, if it tanks first and THEN regroups at lower levels.

[Related -What does Istanbul have to do with AAPL?]

Okay, I've overused the word "probability" in this article.  I'll stop now...




Let's look at the price chart.  First, before I start circling and discussing things, look at the chart and try to find all of the signs that it wants to trade higher, wants to trade lower, or will run into support or resistance.  I'll wait here.  (Scroll down when you're done.)

1-Year Chart AAPL

First, let me say that it has served me very well over the years to not buy TOO MUCH into my own bias.  In other words, what may sound like "talking out of both sides of my mouth" to some people is actually very healthy.  Right now I'm saying Apple isn't a good bullish bet.  But let's consider the bullish argument: 

1.  The computer sector looks fairly strong.  Overall sector strength helps stocks in that sector.

2.  The stock has sold off dramatically and, no matter what they say, everyone will talk about why it won't go higher (crowded bearish trade). 

3.  I see an RSI positive divergence, which tends to be a precursor to a bullish reversal.

4.  We see what MIGHT be a selling climax with a second, slightly higher bottom, followed by a small horizontal resistance level being penetrated. 

But, do you see all the red lines I drew on the chart above?  Those are all resistance levels.  Apple only moved above ONE of them.  (I didn't draw the horizontal resistance set in January that has been penetrated and which is a bit bullish.)

Consider the DOWNSIDE volume the stock has had, and compare that to the recent upside volume.  The selling is much more anxious and aggressive as of late. 

There is an RSI buy signal if you look at the weekly chart, but usually (for AAPL in particular, if you look at the 20 year history) that just means it's in a bottoming process and that can take a year or more. 

Also, the stock gapped down (formed a "window") in January on HUGE volume.  Usually when that happens to a stock, the gap/window is closed (stock retraces that price) so the recent move higher can be somewhat discounted because it's to be expected.  But a gap/window is a continuation pattern.  Usually the stock retraces and then continues on its most recent path -- in this case, down. 

Yes, the stock is oversold.  But oversold doesn't mean over.  And there are 10,000 other stocks to look at out there.  Why go with Apple?  Because it's popular??

Now look at what I circled below...

1-Year Chart - AAPL

The blue circles show how the increasing volume as the stock declines illustrates the fact that institutions are unloading the stock. 

The first set of 3 circles (left) appear to end with a "selling climax" which is seen when the selling is over.  But after a quick retracement, the stock continued down.  It was good enough to create a very reliable downtrend line for us to work with.  Penetrating the downtrend line will be ONE hurdle the stock needs to jump over before we can feel good about it again.

The second group of circles (right) show that same sort of activity, although the final blue circle looks a bit more like a selling climax.  But that's not good enough. 

Look at the red line I drew connecting the lower lows of the stock.  We just ran into that level (purple circle) and couldn't hold above it (old support becomes new resistance). 

Remember I discussed the gap/window?  Well that's a "continuation pattern".  If that gap/window is "closed", but then the stock continues HIGHER (breaks about $520 on strong volume), then that continuation pattern gets converted into a variation of a REVERSAL pattern (bullish reversal -- stock has proven even more strength). 

These are some of the things I need to see before I even THINK of getting bullish on the stock again.  You may recall two articles that I wrote on Apple in the first half of last year (both can be found here).

I told you to stay out of it when it was at $643, being touted by lots of firms with $1,000 price targets, all over the financial media.  I said I wouldn't touch it under $535 and that it could go down to $500.

It then went down to $521 and rebounded up to $705.  I told lots of people I didn't like it in the high $600s again, and that I didn't care if I missed it exploding to $1,000 because it wasn't a high probability bullish trade.  

Same thing today.  Except it's much cheaper.  It's not high probability at this point.  I'd rather buy it higher priced with much higher probability.  But for now?   

I'd stay the hell away from it. 

I only like to play high probability situations.



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