Just before I started trading on the floor of the Philadelphia Stock Exchange, I spent some time at an old Philadelphia boutique investment firm. The firm was small, but handled some of Philly's wealthiest and most respected clients.
The experts at the firm were some of the best in America, and I learned a great deal from all of them. But it was our in-house technical expert, Andy, who I really bonded with.
Andy taught me the importance of charts and demonstrated just how powerful technical analysis could be. As an "options guy" who loved numbers and fundamentals, this was a bit of a stretch for me at first. I couldn't believe that some lines on a screen could dictate how a stock behaves.
Boy, was I wrong.
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In the years that followed, I incorporated technical analysis into my models. To this day, I'm reminded daily just how right Andy was and just how critical the charts -- moving averages, in particular -- can be.
Major moving averages can have dramatic influences on the price of a stock. They can act as support or resistance and serve as propellants when a stock breaks above or below one.
Aside from the relationship that moving averages have on the stock itself, the relationship between the averages can create even more powerful shifts in stock trends, especially in the popular 50-day and 200-day averages.
And that's exactly what we're seeing in one of America's favorite stocks, Apple (Nasdaq: AAPL).
Before I get into the technical analysis, I want to briefly address the recent headlines about a European court ruling that Apple received illegal tax benefits for 11 years and is on the hook to pay about $14.5 billion plus interest in back taxes to Ireland.
First, Apple did not break the law, nor did the company dodge taxes. It simply followed the same route that many companies doing business in the EU continue to follow. It would be similar to the U.S. government suddenly demanding that all Delaware companies pay back taxes at some arbitrary rate at the state level, even though Delaware is a tax-free state and many large corporations choose to set up shop there for that reason.
If Apple is indeed forced to pay these taxes, it would set a precedent that could impact global commerce and business in the EU, not to mention American and European relations. At this point, a final decision is far off (perhaps a month or a year or more), but I highly doubt that Apple will be found liable for the full amount. Traders obviously agree with this logic, as shares barely budged on the news.
So, getting back to the charts...
In August 2015, Apple got a lot of press over a bearish pattern forming on its price chart: the dreaded "death cross."
This technical formation occurs when the shorter-term 50-day moving average crosses below the longer-term 200-day moving average. But don't let the simplicity of the pattern fool you. It's an extremely bearish signal that generally triggers the start of a long-term downtrend.
For Apple, the death cross had very serious consequences.
Apple's price chart had been in the process of forming this pattern for a few months, with prices falling 15% from their high around $130 in mid-April to support around $110 in early August. But it was the Aug. 24 market crash that hammered in the final nail of Apple's coffin. During that single trading day, the Dow Jones Industrial Average plummeted more than 1,100 points, taking most of the market with it. By the end of the week, Apple's 50-day moving average was below its 200-day moving average -- an official death cross.
While some stocks tend to be motivated by moving averages, other stocks, like Apple, have a history of outright respect for them.
For much of the past year, Apple was mired in a rocky, sideways pattern with highs near $110 and lows around $92. Attempts to break above its 200-day failed... until recently. On July 27, Apple finally reclaimed this major level of resistance.
During the 11 months AAPL traded below its 200-day moving average, the company dealt with growing pains and even missed analyst expectations for the quarter ended in March 2016. All in all, a rough year. However, the future may be changing for this tech giant, starting with a monumental shift in its chart patterns.
Last week, we saw the emergence of a rare, strong bullish formation: the "golden cross."
The golden cross occurs when the 50-day moving average crosses above the 200-day moving average. Essentially, it's the opposite of the death cross.
The bullish effects of this occurrence are amplified when the stock is comfortably above both averages, just as we are seeing in Apple right now. And the series of higher highs and higher lows over the past few months show a stock building a bullish trend and validate the strength of the pattern.
From a technical perspective, this is a perfect bullish storm.
Just like we saw with its bearish corollary, the death cross, the golden cross is likely to completely change the stock's behavior. We could easily see a new bullish trend. My initial target is $110, and we could even see shares run back up into the $120s.
The golden cross, in and of itself, is enough reason to buy AAPL. But in addition, nearly the entire field of analysts has Apple listed as a "buy" with a consensus target of $123. Furthermore, we're about to enter a historically bullish period for AAPL shares.
Seasonally, Apple tends to perform well leading up to its annual product announcement in early September, which typically includes major changes to its hardware lineup, as well as updates to its best-selling product, the iPhone. This year marks a major two-year upgrade cycle for the iconic device, and there are big changes expected to come.
In short, all signs point to AAPL being a "buy," with the golden cross signaling this is a good entry point to ride Apple's next long-term bull trend.
In the shorter-term, my initial $110 target is a little more than 2% above the current price. But I have found a way to turn that potential move into a 20% profit over the next few weeks.
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