Apple Could Surprise The Doubters With A Quick Bounce

Wednesday, May 25, 2016 - 12:30pm

by Michael Kahn

It is amazing how a stock can be a rock star one day and a pariah the next. Whereas the rock star shrugs off bits of bad news, the pariah can't seem to get out of its own way.

But when everyone seems to be shunning a stock, good things can start to happen.

And that's exactly what looks to be the case with Apple (Nasdaq: AAPL) following its fall from grace.

After years of cranking out new products and disrupting different consumer markets, the tech giant's stock peaked early last year -- long before it reported its first quarterly revenue decline in 13 years -- and it has been falling ever since. 

What happened to the company that was seemingly on track to become the first with a trillion-dollar market capitalization? Just over a year ago, it was valued at $775 billion, but it now "languishes" at $536 billion and has seen Alphabet (Nasdaq: GOOGL) eclipse it as market cap champ more than once this year. 

At its lows earlier this month, Apple was down by more than a third from its 2015 zenith. And, as if to prove that surprises happen in the direction of the trend, the company fell sharply when it released disappointing earnings news in April. 

On the chart, we can see the gap down following the earnings announcement. Then, in mid-May, AAPL fell below support on heavy volume in what appeared to be a rather significant breakdown. We can blame slowing sales from iPhone suppliers for the move, but on the charts it does not matter why.

AAPL Stock Chart

 

But then something interesting happened. Within two trading days, the breakdown was negated and Apple was once again trading above support. 

The buying was spurred by the disclosure that Warren Buffett's Berkshire Hathaway (NYSE: BRK-B) had made a substantial investment in the company. But again, the why does not matter. 

This time we can see that AAPL followed through on the reversal. In technical analysis, a failed bearish signal (i.e., the breakdown below support) is considered bullish. 

So far, so good, but now we have to put this into the context of a stock that has essentially been in a bear market since the middle of last year.

As we can see in the chart below, there is a well-established series of lower highs and lower lows. (The dramatic August low was the result of the mini-flash crash and lasted only minutes, so we can safely ignore that data point on the chart.)

AAPL Stock Chart

 

With the mid-May reversal, it is not much of a stretch to expect AAPL to reach its declining trendline near $106 once again. Note that the 40-week (200-day) moving average is in the same vicinity as the trendline and adds to its attraction as a target.

Weekly stochastics appear to have hit an extreme low and crossed back over to the upside. Daily charts show a similar cross in moving average convergence divergence (MACD) and a small bullish divergence between the relative strength index (RSI) and price. In other words, momentum indicators in both time frames support a bounce here. 

Considering sentiment is still excessively bearish with calls for CEO Tim Cook's head and some analysts postulating Apple will be the next BlackBerry (Nasdaq: BBRY), the environment is ripe for a contrarian trade. Just remember that AAPL is still in a bear market and this is a countertrend idea. But traders who pounce now could be rewarded with fast gains.

Recommended Trade Setup:

-- Buy AAPL at the market price
-- Set stop-loss at $94
-- Set initial price target at $106 for a potential 8% gain in two weeks

Note: Financial analysts are warning that most investors are not equipped to survive the stock market turmoil expected during the second half of 2016. It's clear the secret to coming out ahead won't be some hot stock or magic trading strategy. That is why we're doing something we've never done before...

This article originally appeared on ProfitableTrading.com: Apple Could Surprise The Haters With A Quick Bounce

Michael Kahn does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.