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Apple Getting Cooked?

12/20/12 08:02:46 AM
by Matt Blackman

How many times have we seen a high-flying stock drop even though the fundamentals looked strong, only to learn much later that there were problems?

Security:   AAPL
Position:   Sell

The media is full of articles about Apple (AAPL). Most have been bullish, touting the stock with recommendations to buy the stock on dips. But technically, there are reasons to suspect that some large or institutional investors have been selling the stock as indicated by the bearish head & shoulders chart pattern that was confirmed today. See Figures 1 and 2.

FIGURE 1: AAPL, DAILY. This chart shows the decisive breach of the nearly year-long head & shoulders neckline, with the head & right shoulder of the pattern on nearly $12 billion share intraday volume.
Graphic provided by:
It is always interesting to watch a stock drop on what fundamentalists often label as unjustified reasons, given the strong underlying strength of the company that they call "panic selling."

FIGURE 2: AAPL, WEEKLY. This chart shows the bearish head & shoulders pattern and breach of the neckline. One note of caution to bears: donít ignore the bullish divergence in the relative strength index (RSI)(see magenta line). It could be warning of a possible bounce.
Graphic provided by:
Apple is not the first high-flyer to drop out of the sky with little or no fundamental justification, but therein lies the problem. By the time there is earnings or revenue justification, insiders and others in the know have liquidated their positions, leaving the fundamentally based investors holding the bag.

One of the best examples in recent memory was the drop in housing stocks in 2005 and 2006. Again, a bearish head & shoulders pattern warned the technically savvy that something was amiss, even though it would take more than a year for the fundamentals to clearly demonstrate the earnings breakdown.

This situation demonstrates a valuable lesson in trading. As one technically savvy journalist put it recently, "History shows that investing solely on valuation is a recipe for losing money."

The lesson here is that it is foolhardy to ignore stock technicals when trying to justify a fundamentally based buying or holding decision no matter how strong the fundamentals appear to be.

Apple may recover and maybe it is oversold on a longer-term basis, but any time a stock puts in a bearish pattern like the one currently appearing on AAPL, it is a warning that should not be ignored. If the stock is going to come back, it will usually give a warning or three that the correction is over in time to jump in and enjoy the next rally.

Matt Blackman

Matt Blackman is a full-time technical and financial writer and trader. He produces corporate and financial newsletters, and assists clients in getting published in the mainstream media. He is the host of Matt has earned the Chartered Market Technician (CMT) designation. Find out what stocks and futures Matt is watching on Twitter at

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