Dow component Apple Inc. (AAPL) carved a picture-perfect cup and handle pattern after topping out near $140 in September, breaking out just three days before blowing away first quarter 2021 top- and bottom-line estimates in January. Bulls' ecstasy lasted just a few minutes before the stock turned tail, failing the breakout two days later. It followed through to the downside on Thursday, dropping through the 50-day exponential moving average (EMA) for the first time since November.
- Apple failed a cup and handle breakout after beating estimates in January.
- The stock is trading below the 50-day EMA for the first time since November.
- Price action is now fully engaged in a correction that could last into the second quarter.
- The $110 level looks like a logical downside target.
Technically speaking, nothing went wrong because the most bullish price patterns fail a good percentage of the time. And the obvious reason for the failed breakout was also technical in nature, i.e. a natural reaction to overbought readings following superior market gains. However, the stock had almost five months to work off those extremes through time rather than price but failed to do so, exposing hidden weakness that has now come into play.
Sector rotation has affected Apple's 2021 price action as well. Alphabet Inc. (GOOG) is the only member of the FAANG quintet currently engaged in a trend advance, with the so-called Robinhood and Reddit crowds moving on to less-traveled opportunities. This follows the classic market wisdom that big winners in one year often underperform in the following year because they're priced for perfection and need to shake out complacent shareholders.
Not surprisingly, Wall Street consensus on Apple stock has deteriorated in the past year, with a "Moderate Buy" rating based upon 19 "Buy" and 5 "Hold" recommendations. More importantly, two analysts now recommend that shareholders close positions. Price targets currently range from a low of $80 to a Street-high $175, while the stock is set to open Friday's session nearly $20 below the median $150. This depressed placement highlights confusion about the legitimate value of Apple shares.
Apple Daily Chart (2018 – 2021)
A 2017 breakout above resistance in the mid-$30s topped out at $58.37 in October 2018, giving way to a steep slide that posted a 52-week low in December. A broad recovery wave reached the prior high in October 2019, triggering an immediate breakout that stalled in the low $80s in February 2020. The pandemic decline tested new support successfully, ahead of a vertical bounce that reached the first quarter peak in June.
The summer rally added nearly 60 points into September and flamed out, generating the bullish pattern that failed after January 2021 earnings. Price action posted two minor warnings ahead of the breakdown. First, the on-balance volume (OBV) accumulation-distribution indicator failed to reach October's all-time high, and second, three upticks into the top failed to generate higher-than-average volume. Even so, neither of these shortcomings set off a strong sell signal.
So what's ahead for Apple? For now, bulls will be watching for a bounce to lift the stock back above the broken 50-day EMA at $131. If that fails, more aggressive sellers could take control and generate downside that tests the lower boundaries of the trading range in place since September. It's instructive to note that the 200-day EMA has lifted to $112, close to the November swing low at $107. It's doubtful that the stock will undercut both of those support levels.
A cup and handle price pattern on a security's chart is a technical indicator that resembles a cup with a handle, where the cup is in the shape of a "u" and the handle has a slight downward drift. The cup and handle is considered a bullish signal, with the right-hand side of the pattern typically experiencing lower trading volume. The pattern's formation may be as short as seven weeks or as long as 65 weeks.
The Bottom Line
Apple failed a cup and handle breakout in January and has now sold off to a four-week low, with downside potentially stretching toward the $110 level.
Disclosure: The author held no positions in the aforementioned securities at the time of publication.