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FLAGS AND PENNANTS


Apple Settles After Support Break

05/05/05 02:08:00 PM
by Arthur Hill

Apple has consolidated over the last two weeks and is likely to make a significant move sooner rather than later.

Security:   AAPL
Position:   Hold

After meeting resistance around 45, the stock broke below its March low with a gap-laden decline on high volume (red arrows). Up until this time, the stock had held up relatively well in 2005, but finally succumbed to overall pressure in tech stocks. A pennant consolidation formed over the last two weeks, and the resolution of this pattern holds the key.

The pennant is typically a continuation pattern and the prior decline gives this pattern a bearish bias. As such, a move below 35 would signal a continuation lower and the downside target would be support around 30. This support area is confirmed by the 200-day simple moving average (SMA) and the December lows. See Figure 1.

Figure 1: Apple. The potential is there for an upside breakout.
Graphic provided by: MetaStock.
Graphic provided by: Reuters Data.
 
Even though the pennant carries a bearish bias, I would still be on the lookout for a potential upside breakout. First, the 200-day SMA is rising and the long-term trend is clearly up. Second, the relative strength index (RSI) reached oversold levels in mid-April and bounced over the last two weeks. A move above the pennant high ($37.74) would put the bulls back in play. For confirmation, I would look for RSI to break above 50 and volume to expand.



Arthur Hill

Arthur Hill is currently editor of TDTrader.com, a website specializing in trading strategies, sector/industry specific breadth stats and overall technical analysis. He passed the Society of Technical Analysts (STA London) diploma exam with distinction is a Certified Financial Technician (CFTe). Prior to TD Trader, he was the Chief Technical Analyst for Stockcharts.com and the main contributor to the ChartSchool.

Title: Editor
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Date: 05/05/05Rank: 4Comment: 
Date: 05/08/05Rank: 5Comment: Very efficient presentation of concise conceptual analysis on entry.
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