APPLE: Something is Rotten

The charts are giving warnings in Apple (AAPL). We'll get to that in a minute.

First: The story behind the charts.

Apple has been a spectacular performer over the past two years, rising from around $80 a share to a recent high of 422. AAPL has been astoundingly resilient, being it is the largest weighted stock in the NASDAQ index, mostly side-stepping a decline of over 18% in the stock market this summer.

Boosting the stock, recently, has been anticipation of the release of the iPhone 5, which is supposed to have a better antenna and larger viewing area. Also, APPL has been considered a "safe-haven" stock, being its PE is historically low at 16 times trailing earnings and they have about $30 billion of cash on hand.

On Tuesday of this week, AAPL fell sharply early in the day on a report that it was cutting back on purchases of materials for iPads by 25%. That was later refuted, and the story was corrected to say it was believed they were just switching their manufacturing location to Brazil. The stock did recover, however, ending the day down a bit, while the stock market had a very good day. When there is smoke...?

While Apple products are amazing, and I've had an iPhone for three years and love it, the competition for their products is huge. It was just reported that Droid phones are outselling iPhones by 2-1. Even with Research in Motion's (RIMM) disastrous entry into the tablet market, there are a massive number of new tablets that are out there or coming on line. What this means is that Apple's products, once unique, are being commoditized. When this happens, prices and margins fall. Amazon's new tablet is coming soon, which is said to be priced at only $299.

Below is a daily chart of AAPL. There are three important things to note here. First, I have highlighted in the grey oval, there is a very reliable candlestick sell signal; an evening star. On the bottom of the chart is volume. You can see that the pattern was completed on a down day on high volume. That's an additional confirmation. Also, I have included the 89'day moving average. This stock has had a history of moving significantly above this moving average and then trading back down to it. You can see that happened last August. That average is now at 365, some $40 lower than APPL's current price.

 

 

Apple Daily chart courtesy of TD Ameritrade

Even if the story of a cutback in iPad manufacturing does not come back, the technical picture in this stock is warning of something negative. It may just be that too many investors have parked money here because they think its safe relative to other stocks, certainly European ones. Or it might be that margins and earning projects are just way to high for this highly competitive market.

I'm betting we'll see that $365 level in AAPL soon.

Full disclosure: I have no position in AAPL at this time. I do plan on shorting it today.

AAPL SLM, Weekly trend channel supports your case.GP Submitted by GP (not verified) on Tue, 2011/09/27 - 4:40pm » reply |