By James Hyerczyk
Commodity Trading Advisor
Earlier in the week, Apple Inc. (AAPL) soared to $618.00 after reaching a low the previous day at $555.00. The solid 9.1% gain boosted the stock well above the $600 a share price and marked the biggest one-day jump in price since November 2008. The strong rally was fueled by the news that the technology giant posted fiscal second-quarter earnings and revenue well-above analyst expectations.
The tremendous rally in the bellwether tech stock helped dismiss fears of a potential slowdown in iPhone sales and concerns about Apple being too large to grow. This assessment may have been true on Wednesday, the day after the bullish earnings report, but by Thursday, signs were already developing that suggested the stock was due for another set-back as the stock may have once again become too pricey. Although the price action was strong immediately after the release of the report, the move was based on old news and investors may once again be asking themselves if Apple will be able to maintain its revenue growth, margins and earnings.
This question may be answered early next week if the stock tests a key retracement area as forecast. To recap the recent trading action in Apple, the stock topped at $644.00 on April 10, setting off a 10-day break to $555.00. The move was considered corrective since it equaled 13.82%, well-above a 20% correction which would have put it in another category. Although the stock was trading on the bearish side of a key retracement zone at $680.11 to $565.03, this area was quickly regained by the gap-opening on April 25.
The subsequent rally to $618.00 fell short of the recent high at $620.25 and slightly below a downtrending Gann angle at $622.00. This cluster marks the major resistance area which must be overcome to launch a test of the high at $644.00.
According to the current daily chart pattern, there are two scenarios developing. The first scenario forecasts a potential test of the Gann angle/50% level support cluster at $603.00 to $599.50 on April 27. A test of this zone may produce an initial technical bounce to the upside, but may not represent enough of a retracement from the top to be attractive to new buyers.
A second scenario may be more attractive to value-seekers since it will represent a 50% correction of the entire rally from $555.00 to $618.00. This price level is $586.50. A test of this level may encourage buying from the crowd that “couldn’t get in at $555.00, didn’t want to chase at $618.00, but would like to enter somewhere near the middle of the range”.
The retracement level at $586.50 will be significant on April 30 because it will intersect an uptrending Gann angle at $587.00, forming a possible support cluster between the two numbers. This is essentially the value-zone that may be most attractive to buyers.
Keep in mind that testing a value-zone is no guarantee that the trend is ready to turn up again. The daily chart pattern suggests that Apple is still in a downtrend based on the swing chart. Additionally, the high at $618.00 may develop into a secondary lower-top which will be confirmed by a trade through $555.00. If a broad-based lower-top, lower-bottom chart pattern develops then swing chart price and time theory suggests a possible move to $529.00 over the next 7 to 10 days.
If Apple survives a correction into the retracement zone at $586.50 to $579.07 and begins to rally, a possible secondary-higher bottom will form. This will be confirmed by a breakout over $618.00. A failure to breakout over $618.00 or under $555.00 will mean that Apple will be doomed to trade sideways until investors can figure out whether it can maintain its torrid upside pace or if it prices need to fall to more “affordable” levels.
Traders should watch both sides of the market over the next few days because buyers and sellers are likely to try to defend their positions at the retracement zones. This may create a rangebound or “ping-pong” trade, but once a winner is declared, volatility is going to increase and Apple will make its next big move.
Furthermore, the lack of follow-through to the upside following the rally to $618.00 could be a sign that the stock is overpriced once again and that another down move is in the makings. Based on the short-term range of $644.00 to $555.00, an additional retracement zone was formed at $599.50 to $610.00. Although the stock exceeded this area because of the strong upside momentum on April 25, it did fall back into the next day, making the rally appear to be “normal”.
The first key area to watch is: