Dow component Apple Inc. (AAPL) has lifted an astounding 65% in the past six months, posting an all-time high at $323 in Friday's session. These gains look unsustainable, raising the odds for an intermediate correction that could relinquish 50 or more points in the first quarter. Monday's virus-driven downturn may signal the first wave of this decline, with the stock down nine points in Monday's pre-market session.
Relative strength indicators have lifted to extremely overbought weekly and monthly technical readings that have triggered past corrections, and it's unlikely to be different this time around. The stock has attracted an enormous supply of complacent shareholders since the summer of 2019, blinded to the reality that markets move in both directions. This amnesia could end with a shock event, like the current coronavirus outbreak, or more slowly through a pullback that gathers momentum over a few weeks.
The company is set to report earnings in Tuesday's post-market, with Wall Street analysts expecting earnings per share (EPS) of $4.18, an increase of $0.20 year over year, on a breathtaking $86.2 billion in fiscal Q1 2020 revenue. The stock hit new highs after beating estimates in October's Q4 2019 report, which generated an avalanche of fresh upgrades. Given highly overbought readings, there are no guarantees that equally bullish metrics this week will have a similarly positive effect.
Questions about the coronavirus outbreak's impact on China iPhone sales and Apple's supply chain may also arise during the post-release conference. Of course, it's too early to gauge the actual Q2 2020 impact, but that hasn't stopped key economic indicators, including crude oil and bond yields, from spiraling into major declines. It's rarely a good thing for economic growth when consumers are distracted by potentially lethal real-life issues.
AAPL Long-Term Chart (2007 – 2020)
A multi-year uptrend ended out at a split-adjusted $29.00 in December 2007, giving way to a double top pattern, followed by a breakdown during the 2008 economic collapse. The sell-off found support in the lower teens in January 2009, ahead of a recovery wave that completed a round trip into the prior high in 2010 (red line). The subsequent breakout posted impressive gains into the 2012 top at $100.75, while a correction into 2013 ended at the 50-month exponential moving average (EMA).
The stock broke out again in 2014, adding more than 30% into the 2015 peak at $133, and sold off into the 50-month EMA for the second time in 2016. It repeated this fractal behavior a third time after topping out in the $230s in 2018, telling market players to watch the level closely during the next major downturn. At the moment, a sell-off into support would translate into a decline in excess of 140 points, but the moving average is currently rising more than 30 points per year.
AAPL Short-Term Outlook
The rally wave since January 2019 has now reached the 2.00 Fibonacci extension of the 2018 decline. This is a common reversal zone after strong trend advances, increasing the odds for a multi-week pullback. More importantly, Apple stock has now posted vertical gains for five months in a row, giving the long-term pattern the look of a trend climax or "blow-off" event that is commonly associated with multi-year tops.
The monthly stochastics oscillator follows the same cautionary theme, lifting into the most technically overbought reading so far this century. In addition, the indicator has just printed a bearish crossover at this level, which marks a modest red flag that requires a downdraft though the 80% line to set off a major sell signal. That won't take long if the current pullback in broad benchmarks gathers downside momentum.
The Bottom Line
Apple stock may reverse at or near the current price level, yielding a multi-month correction that shakes out an enormous supply of weak hands.
Disclosure: The author held no positions in the aforementioned securities at the time publication.