The Apple Triangle

08/31/06 03:11:44 PM

by David Penn

An ascending triangle interrupts a rally in shares of Apple Computer. Is it the pause that refreshes?

Security: AAPL
Position: N/A

Far more often than not, consolidations in trends tend to lead not to reversals but to more trend.

FIGURE 1: APPLE COMPUTER, WEEKLY. This symmetrical triangle emerges after a strong move off the July lows. Note also the declining volume over the course of the pattern in August.

Graphic provided by: Prophet Financial, Inc.

I've made this point repeatedly in recent articles when discussing symmetrical triangles in markets such as Google, copper, and sugar ("The Google Triangle," August 23; "The Copper Triangle" and "The Sugar Triangle," both from August 25). Ironically, in those instances, I was warning readers not about the possibility of these triangles ushering in renewed pushes higher, but about the very real chance that these symmetrical patterns represented tops. "The Sugar Triangle" in particular was presented to show just such a triangle-as-top scenario.

Although shares of Apple (AAPL) are moving toward a source of potential resistance near the 72 mark, my suspicion is that the triangle shown in Figure 1 is more likely to be the sort that leads to higher, rather than lower, prices. For one, compared to the symmetrical triangles in Google, copper, and sugar, this triangle is nowhere near the end of an extended rally. In addition, whereas those other triangles were symmetrical involving two converging trendlines, the triangle in Apple is of the ascending variety, in which a rising support trendline converges with a flat or horizontal resistance trendline. While such triangles can be failures, sending prices back downward whence they came, successful ascending triangles are often the harbinger of major price appreciation in the near term.

FIGURE 2: APPLE COMPUTER, DAILY. The size of the moving average convergence/divergence (MACD) histogram during AAPL's bounce in late July is one sign that the price highs reached during the histogram peak will be exceeded.

Graphic provided by: Prophet Financial, Inc.

It should be of little surprise that Apple would consolidate at these levels. There is virtually no resistance between 60 and 72, witnessed by the stock's ability to leap up from its July bottom near 50 to just above 60 and then continue on to just shy of 70 in roughly two weeks. The resistance comes in the form of the old correction highs in May, April, and even late February. It could be argued that consolidations like ascending triangles that tend to be especially bullish were built for breaking through the kind of resistance that Apple will be facing as it attempts to move higher. The combination of consistent resistance at the top of the pattern and steadily higher lows helps build up pressure, not unlike a coiled spring, that when released explodes into a frenzy of buying by those who doubted the upside potential of the pattern—or simply preferred waiting until that upside potential was confirmed by way of a breakout. See Figure 2.

What sort of upside potential are we talking about? The ascending triangle in Apple measures approximately six points, from a closing high of 70 to a closing low near 64. Adding those six points to the value at the top, the horizontal resistance level, suggests a minimum upside of 76 points over the next few weeks. Such a move would take out the May, April, and late February highs already mentioned, and give the stock a chance at taking on the even-higher January 2006 highs just shy of 87. As far as specific entries are concerned, my histochastic screen points to 68.67—as does the TRIX screen. The BOSO screen is especially interesting. While it has not produced a fresh buy signal recently, the buy signal it did offer back in late July at 63.87 has yet to be stopped out—even when the correction of early August brought Apple to as low as 63.59 on a closing basis.

David Penn

Technical Writer for Technical Analysis of STOCKS & COMMODITIES magazine, Working-Money.com, and Traders.com Advantage.

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The Apple Triangle

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