By James Hyerczyk
Commodity Trading Advisor
Throughout 2011, Apple Inc. (AAPL) demonstrated several times that it was not immune to the market turmoil created by the sovereign debt crisis in Europe. Before launching the start of a major rally in late December, Apple was locked in a range between $310.50 and $426.70 as investors were reluctant to commit to either side of the market in a big way until the problems in Europe were fixed.
After reaching the low for the year at $310.50 on June 20, Apple produced a series of higher tops and higher bottoms that led to the start of a huge rally to $644 once the market overcame a key swing top at $426.70 in early January.
After the extended Easter week-end, Apple Inc. bucked the trend of the major stock indices until early Tuesday when it topped at $644.00. The subsequent selling pressure helped form a daily closing price reversal top and put the market in a position to post a weekly closing price reversal top should bearish conditions continue into the end of the week.
Based on the weekly main range created by the rally from $363.32 to $644.00, conventional chart analysis suggests a correction to $503.66 - $470.54 is likely over the next two to three weeks if Apple closes this Friday below last week’s close at $633.68.
Last year Apple experienced four major corrective moves. The first was $364.90 to $310.50, or $54.40. The second was $404.50 to $353.02, or $51.48. The third break was $422.86 to $354.24, or $68.62. The last break took place from late October to late December and was formed by $426.70 to $363.32, or $63.38. From a percentage standpoint, each corrective move fell between 13 and 16 percent of the immediate top.
A typical closing price reversal top often leads to the start of a 50 to 61.8 percent retracement of the last major rally. However, based on the four most recent down swings, Apple may be subject to a corrective move equal to 13 to 16 percent of the $644.00 top. Using a 15 percent correction as the benchmark, short-term traders should anticipate a pull-back to at least $547.40 by the week-ending May 11.
Depending on how one measures a “correction”, Apple Inc. may be vulnerable to a correction of at least 15 percent from the $644.00 top to $547.40, or at least 50 percent of the rally from $363.32 to $644.00, to $503.66.
Stocks began to feel pressure on Friday as investors reacted to a substantial shortfall in March U.S. jobs growth. Traders also reacted negatively to a report showing China’s imports grew less than expected. But it is the sell-off in Spanish and Italian debt that could be the catalyst for an even sharper break in U.S. equity markets.
Although consumers continue to buy IPads and Apple is flush with more than enough cash, it may be time for investors to take a little off the table if the U.S. equity indices begin to correct. It’s been a while since the markets reacted to a sovereign debt crisis, but clearly problems are developing in Italy and Spain that could encourage investors to pare their positions in Apple rather than face a 10 percent or more correction.
The good thing about a correction is that it helps to identify a value area, or a price level where investors really want to own the stock. Recently there have been predictions that Apple would reach $1000 per share. While this is possible, it is still susceptible to reasonable corrections especially if the whole market decides it is time for a pull-back.
So with U.S. stock indices beginning to show signs of weakness, Apple Inc may be next in line for a near-term change in trend. The daily chart will be the first to indicate the start of a correction, followed by the weekly chart. As of Tuesday’s close, Apple was already showing signs of weakness with its reversal to the downside. The next level to watch will be last week’s close at $633.68. This price should act as a pivot until Friday when the market is going to have to make its move.
If the U.S. economy continues to show signs of weakening and the sovereign debt situation in Italy and Spain begins to worsen, then combined with a bearish technical picture, Apple, Inc. may be setting up for a sharp, but reasonable correction.