Dow component Apple Inc. (AAPL) broke out above the February high at $328 on Wednesday, posting an all-time high in the $340s less than 12 weeks after a wicked first quarter decline found support just above $200. However, buying pressure has failed to keep up with remarkable price action, grinding out weak accumulation readings that are warning traders and investors to act cautiously in coming weeks, despite the vertical ascent.

Upgrades from Deutsche Bank, HSBC Securities, JPMorgan, and BoA/Merrill have underpinned this impressive advance, but Apple stock still faces major challenges over the next few quarters in rebuilding iPhone and hardware sales that have been hurt badly by the coronavirus outbreak and retail store shutdowns around the globe. While many American stores have reopened, continued worries about a "second wave" and potential impact from political unrest could undermine floor traffic and quarterly sales.

We're nearing a typically quiet period between the end of the quarter and July earnings season, with Apple set to report third quarter 2020 results on July 28. Company disclosures and news flow tend to dry up at this stage in the cycle, with rumor mills then kicking into gear during the run-up into earnings, often through Asian technology sites. The lack of catalysts could induce a gravity-driven reversal into July, with shareholders taking profits as short-term technical levels get breached.

AAPL Long-Term Chart (2005 – 2020)

Long-term chart showing the share price performance of Apple Inc. (AAPL)
TradingView.com

The stock broke out above the 2000 high at a split-adjusted $5.37 in 2005, entering a powerful uptrend that topped out at $29.00 at the end of 2007. It carved a double top pattern at that level into September 2008 and broke down, dropping to a two-year low in January 2009. That relative strength compared to broad benchmarks underpinned a strong recovery wave, making Apple one of the first blue chips to post new highs after the economic collapse.

The uptrend stalled in 2012 and 2015, with corrections finding support at the 50-month exponential moving average (EMA) in 2013 and 2016, respectively. This symmetry came into play once again during the fourth quarter decline in 2018, generating the third successful test at that level in six years. The subsequent uptick completed a round trip into the 2018 high in October 2019, yielding an immediate breakout and rally that ended at $328 in February 2020.

The monthly stochastic oscillator crossed into a sell cycle from the overbought zone in February 2020, predicting at least six to nine months of relative weakness, but the indicator crossed higher at the panel's midpoint in May and established an interim buying signal. It has now lifted back into the overbought zone, highlighting bullish power that has underpinned the three-month rally and breakout. However, the 20-month Bollinger Band® has now lifted outside the top band, warning that the rally has become overheated and is in need of a pullback.

AAPL Short-Term Chart (2018 – 2020)

Short-term chart showing the share price performance of Apple Inc. (AAPL)
TradingView.com

The 2020 chart has carved features of both the inverse head and shoulders and cup and handle patterns, but second quarter price action does not fulfill the requirements of either classic formation. Specifically, the stock hasn't taken the time at resistance to work off short-term overbought readings and volume divergences through a sizable handle or right shoulder. As a result, the breakout may be hard to sustain, raising the potential for trapped trend followers.

The on-balance volume (OBV) accumulation-distribution indicator complements this less-than-bullish analysis, failing to cross the 50% retracement level at the time of the breakout. In turn, this signals a major bearish divergence, warning that the stock has not gathered the institutional sponsorship and buying power needed to sustain higher prices. It also indicates that short covering rather than committed buyers has driven the recent advance.

The Bottom Line

Apple stock has broken out to an all-time high, but bearish divergences raise the odds that the rally will fail and reinforce resistance just above $300.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.