Apple (Nasdaq: AAPL) has been on a decade -long tear, rewarding many investors pretty handsomely.
But in a September Investor Playbook piece we published last year near the stock’s peak, we played contrarian and warned investors that Apple’s major run (in anticipation of the iPhone 5 release) was just about out of steam in the intermediate-term and that some significant ground would be ceded in the charts.
It was a bold prediction…
But we were dead on and able to cut through the glamor based on underlying concerns stemming from a CEO transition, the company’s idle cash and dividend announcement (indicating slower growth on the horizon).
Then there was the diminishing cool factor where everyone and their neighbor carried the same Apple products. Suddenly, the various shapes and sizes Android devices offered customers started to seem cool themselves. Obviously, these factors alone were not enough to drive Apple into the proverbial ditch. But it all started to accumulate.
In the chart below, we are witnessing a continued pullback in the stock, which is a healthy thing as long as certain technical rules are not violated. We have drawn horizontal lines to reflect both initial support near $400 per share and then major support much lower around $200 per share. Should Apple stock fall below $400, investors would be wise to steer clear until the $200 level is reached and successfully tested. Using Elliot Wave analysis, we can gain further insight…
Chart: AAPL Buying Below $400 Becomes Very Risky
The waves labeled above represent what we see on a monthly price chart to be the true and valid structure. This third bullish wave within five total waves is typically the largest bullish move where waves one, three and five advance. Naturally, this means that waves two and four are minor pullbacks in the grand scheme of AAPL. While we need more internal wave evidence for confirmation, it appears as if Wave III has ended and AAPL is now going through its fourth wave pullback.
Chart: AAPL is Likely in Wave 4 out of 5
You might be wondering where it ends.
Well, there is one important rule that applies here which states that “wave 4 cannot overlap with the price territory of wave 1”. Hence, it is imperative that buyers step in en masse to hold the $200 area. This is the firewall where investors may eventually find value.
Furthermore, two important indicators (MACD and DMI) have gone bearish in the intermediate-term. It will take at least one of these indicators to turn positive again before the stock’s downward trajectory is slowed to a halt and potentially reverses course into a bullish wave five climb.
So while AAPL shares have pulled back some, investors should continue to wait on the sidelines a bit longer. We know it’s tempting with AAPL trading at a price-earnings multiple that’s at a discount to its industry, the S&P 500, and even its own five-year average. If – and only if – support is found then it may be wise to at least dip your toes in the water on an initial position. Any continued weakness in AAPL and it may be a few years before another smart buying opportunity comes along at around $200 per share.
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