Thursday, December 22, 2011

Charting AAPL

In light of trepidation in tech land due to ORCL's surprising miss, I wanted to look closer at one of my favorite "generals" of the market - AAPL. I realize that it is in a completely different segment of tech, and parallels are not to be drawn here at all. Nonetheless, if the whole tech sector is to crumble under the weight of possible enterprise spending slowdown/cutbacks/freeze, AAPL (with 12% index weighting) may become a make or break stock for NDX, by either smoothing or exaggerating the ensuing decline.

In order to understand how strong this amazing stock has been, one has to pull up the weekly chart (shown below). You can clearly see that price has respected boundaries of an uptrend channel (with 75-point width) for almost 3 years now. 50-week simple moving average has been a very good guide and support. A double-top head and shoulders with triple bottom neck and a distance of 73 points has now developed (but not fully completed due to right shoulder still being in progress).

I see two scenarios for this universally loved stock:

1. Right shoulder does not materialize, price breaks above $410 and keeps on going to challenge the highs, eventually making new highs at the top of the channel, somewhere around $450 - $460.
2. Price runs into $410 resistance and gets rejected, right shoulder develops, price breaks down below bottom of the channel, below 50 wsma, and eventually below the neck at $353 and keeps on going down to projected targets. Ultimate target is 73 points (h+s distance) below the neck = $280. Possible support on the way to $280 would be $319, $310, and 75-point extension from channel breakdown (not known yet).

My first scenario is more likely because it is supported by direction of the trend and AAPL's very strong fundamentals, like enormous cash on balance sheet, fast growth, and reasonable valuation. But my second scenario is not to be totally dismissed until price decisively breaks above $410, especially if something goes terribly wrong with the company, its sector, or the entire stock market.

click on chart to enlarge

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