AAPL: The Anatomy Of A Bear Market, Part I

By -

I was asked if I had any updates to share on AAPL (Apple Inc) and figured that as the world’s largest publicly traded company & one of (usually THE) most widely held stocks, my thoughts on Apple were worth sharing. In doing so, we’ll begin with a look at the recent technical developments over the past several months & near-term outlook, followed by a look at the weekly & monthly charts and my thoughts on where the stock is most likely headed in the coming months & possibly years.

In this post published on April 28th, literally the very day that AAPL printed it’s all-time high, I had pointed out several bearish technical developments, including a bearish engulfing candlestick, also stating that “clear bearish divergences are signaling that the odds for at least a substantial multi-month correction or bear market (in AAPL) are elevated at this time.”

Just over 3 months later, in this post published on Monday, August 3rd, it was stated that “AAPL (Apple Inc.) is currently testing dual critical support levels: The primary bull market uptrend line generated off the 2009 lows as well as the 40-week/200-day ema. In fact, AAPL has actually broken below the 200-day ema so far today although a weekly close below that level (the 40-week ema is the same as the 200-day ema) as well as the January 2009 primary uptrend line and especially two consecutive weekly closes, would greatly increase the odds that a new bear market (i.e.- drop of 20% or more) is underway in the world’s largest publicly traded company.” Apple continued to trade below both its 200-day/40-week ema & primary bull market uptrend for the remainder of the week, closing comfortably below both key support levels, thereby greatly increasing the odds that a new bear market was underway.

Fast-forward to August 24th when AAPL printed a low of 92.00, which translates to a drop of 31.6% from the April 28th highs, more than enough to satisfy the definition of a bear market (i.e.- a drop of 20% or more). Now where does AAPL go from here? In my opinion, lower. Much lower.

While a nearly 32% drop in such well run, mega-cap stock as AAPL might certainly be considered more than enough of a drop to alleviate the over-bought, over-owned (and more importantly IMO), over-loved conditions in the stock, nearly everything I see on the charts tell me that AAPL is likely to take out the August 24th lows before it moves back above the April 28th highs. In this monthly chart spanning nearly 32 years, I’ve marked the top & bottom of every cyclical bull & bear market, calculating the total drop from peak to trough of each bear market. To be accurate, some of those bull & bear runs were so large that there were smaller bull & bear markets (20%+ gains & losses) within but for the sake of simplicity, I only pointed out the major bull & bear markets.

AAPL monthly Sept 3rd
AAPL monthly Sept 3rd

The average drop for the previous six bear markets (not including the current bear market, as there isn’t any evidence that it has ended yet) was 65.5% with a range as low as a 45% drop on the most recent bear market (the bulk of which AAPL was listed as an Active Short trade on RSOTC) and the largest drop coming in at 83% (2000-2003). As stated above, from the April 28th highs to the August 24th lows, Apple has only fallen by just under 32% so far. Based on my analysis of the charts, including the relatively short duration (so far) of the current bear market, it would appear that this market leading stock will experience additional downside in the coming months and quite likely well into 2016.

Another reason that I believe the worst (or best, for those comfortable with shorting) isn’t over yet, would be the fact most stocks in a bear market continue to move lower until they have experienced oversold conditions, as measured by readings of 30 or below on the weekly RSI, for at least several weeks, if not months. I am not referring to persistent readings at or below the 30 level. In fact, what I usually see is an initial tag or thrust down below the 30 level, followed by the RSI crossing back above, only to turn down lower and move back down or very near the 30 level again. Most bear markets end with the RSI (and many other price oscillators & momentum indicators such as the MACD) making one or more higher lows, i.e.- positive divergence.

As this 10-year weekly chart shows, that is clearly not the case with AAPL. In fact, despite the 32% drop off the April 28th highs, AAPL never even managed to make it to the oversold (30) level, closing last week at 31.88 before reversing & moving higher so far this week. If the bear market in AAPL did indeed end with the August 24th lows, it would be the first time in over a decade, possibly ever, that a bear market in this particular stock ended without crossing the oversold threshold (30 level) on the weekly RSI 14.

AAPL weekly Sept 3rd
AAPL weekly Sept 3rd

O.K., you’ve made your point, now what? I missed the top but it’s too late to chase an AAPL short here, right? On the contrary. Thanks to the first-wave of dip-buyers (in what may likely prove to be a new bear market in US equities) that stepped in to buy the meltdown on August 24th, AAPL has managed to retrace 50% of the move down from the April 28th top (and so far, stopped cold on every attempt at this key Fib level since). That key 50% Fibonacci retracement level comes in around the 113.40ish area, the same level which AAPL tested but failed to regain on several attempts lately. Personally, I’d put decent odds that AAPL makes a run at the next key Fib retracement level, 61.8%, which comes in nearly perfectly with both a backtest of the primary bull market uptrend line and the key 200-day/40-week ema (which has done an excellent job in the past of defining/containing bull & bear markets in Apple in the past) but I would not be surprised in the least either, if the bounce in AAPL has already run its course.

AAPL daily 2 Sept 3rd
AAPL daily 2 Sept 3rd

There is no such thing as a fail-safe or guaranteed trade but as far as objectiveness & attractive R/R profiles go, shorting a bounce to the 117-120 level on AAPL with a stop based on a solidly weekly close back above both the 40-week ema and the bull market uptrend line (maybe even two consecutive closes above, if you are willing to give the position some room) is about as good as it gets. Keep in mind though, they don’t make it easy to perfectly time entries or exits, especially over the last few years. As such, my primary scenario would be that AAPL does not make it there and begins to move lower from at or near current levels with my alternative scenario being a pop above the 120 area to blow out the shorts & suck in the last of the bulls, nearly immediately followed by a resumption of the current bear market. Should the stock continue higher, going on to take out the April 28th highs, then my analysis at this point will have just been plain wrong so as always, DYODD.

An ideal short entry would be on any bounce up to 117 but no higher than 119 although if AAPL & the broad markets start to roll over before then, one could certainly short with a lower stop-loss in place. I’ll be looking forward to following up with part II in the not-so-distant future, should the charts play out as expected.

Do NOT follow this link or you will be banned from the site!