Apple Enters The Reversal Zone

04/05/06 10:12:40 AM

by Arthur Hill

Apple led the market lower over the last two to three months, but recently, it entered a reversal zone. The correction could be nearing its end.

Security: AAPL
Position: Accumulate

The big trend for Apple Computer (AAPL) is clearly up. The stock moved from below $10 to above $80 in the last three years. The current decline is indeed sharp, but it should be considered in the context of the prior advance. The most recent leg up extended from mid-$30s to the mid-$80s. This is another massive move, and some sort of correction would be entirely normal.

FIGURE 1: AAPL. Apple Computer shot up from below the $10 level to above the $80 level in the last three years, so while the current decline may be sharp, it should be considered in the context of the previous advance.

Graphic provided by: MetaStock.

Just how much correction would be normal? In Fibonacci terms, a 62% retracement of the prior advance is normal. In Dow theory terms, the 50% principle can apply and a correction can give back half of the prior gain. I will take the middle ground and establish a retracement zone between 53 (62%) and 60 (50%). The stock entered the top of this zone in late March (Figure 1), and we should be on guard for a bullish reversal.

In addition to the retracement zone, I am watching the chart pattern and the relative strength index (RSI). The stock formed a falling wedge, and this is classic for a correction. At the very least, a move above the upper trendline is required to break the fall. RSI moved below 50 and this area foreshadowed a reversal early last summer (gray oval). Strong stocks rarely become oversold (below 30), and we must therefore look for support in the middle (50). RSI is trading just below 50 now, and this is support. A move back above would put momentum back on the upward track.

As of this writing, AAPL is trading above $65 with a big gap on big volume (April 5). This is a catalyst-type move that affirms the reversal zone put forth. As long as the gap holds ($61), I will expect further gains.

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.

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