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Stocks  | March 15, 2019

Dow component Apple Inc. (AAPL) traded above the 200-day exponential moving average (EMA) for the first time since November on Tuesday, but the healthy bounce off December's 20-month low could end soon, trapping newly minted shareholders in a steep decline that fills the Jan. 30 gap between $155 and $160. Timely short sales taken during this period could offer opportune profits ahead of the company's first quarter earnings release on April 30.

The stock has risen more than 28% since December, booking a year's worth of gains in less than three months. Intermediate technical readings have surged into overbought levels during this period, raising the odds for a downturn that relinquishes a big chunk of 2019 upside. More importantly, a decline that reaches last year's low would complete a head and shoulders topping pattern that could signal the end of the multi-year uptrend.

AAPL Long-Term Chart (1991 – 2019)

Long-term technical chart showing the share price performance of Apple Inc. (AAPL)

The stock topped out at a split-adjusted $2.62 in 1991, following a multi-year uptrend. That level contained the upside until a 1999 breakout reached $5.37 at the turn of the millennium, marking the highest high for the next five years. The stock turned sharply lower when the internet bubble burst, bounced under a buck at the end of 2000 and tested that trading floor repeatedly into the second quarter of 2003.

Committed buyers then took control, generating an uptrend that completed a round trip into the 1999 high in February 2005. The stock broke out immediately, entering a trend advance that posted impressive gains during the last half of the mid-decade bull market. The rally stalled near $30 at the start of 2008, giving way to a downturn that held 2006 support during the economic collapse. 

This resilience underpinned a strong recovery wave that reached the 2008 high at the end of 2009, yielding an immediate breakout to new highs. Upside continued into the 2012 high at $100.75, yielding a pullback that found support at the 50-month EMA. The moving average also ended the decline into 2016 as well as last year's sell-off, raising the odds that the stock will eventually reach new highs. However, price action still hasn't carved a higher low, which is needed to build long-term support.

The monthly stochastics oscillator fell into the oversold zone in 2009, 2013, 2016 and 2018, and crossed into buy cycles that matched strong bounces. However, the stock tested moving average support for at least five months in 2009, 2013 and 2016, exposing the current advance to a multi-week decline that shakes out weak hands. That may happen soon because the weekly indicator has now reached the overbought zone.

AAPL Short-Term Chart (2016 – 2019)

Short-term technical chart showing the share price performance of Apple Inc. (AAPL)

A Fibonacci grid stretched across the uptrend that started in 2016 places the December low at the .618 retracement level, while current action has reached the .382 retracement. This level also marks the .382 sell-off retracement, while both levels have narrowly aligned with the declining 200-day EMA. This potent combination predicts that the current uptick will end in the $180s, ahead of selling pressure that targets the unfilled January gap at the .50 retracement level near $160.

The on-balance volume (OBV) accumulation-distribution indicator hit a new high in 2012, while the subsequent distribution wave ended in 2013. OBV has traded within those boundaries for the past six years, reflecting a tightly managed security with deep institutional support. The indicator fell to a two-year low in December, while the bounce into March has recouped about half of last year's deficit. This reflects a relatively benign technical condition in the early stages of new accumulation.

Traders interested in playing the downside should wait for a reversal at the 200-day EMA. A subsequent decline to $175 will wave a red flag, but a breakdown at the horizontal 50-day EMA is needed to issue a more potent sell signal that forecasts a swift decline toward $155. It may be wise to reverse positions if that target is reached because long-term relative strength cycles predict that Apple stock will eventually resume its upward trajectory.

The Bottom Line

Apple's bounce off the December low could end soon, generating 15% to 20% downside that rewards timely short sales.

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