Dow component Apple Inc. (AAPL) may be at or near a long-term top that won't be challenged for months or years to come. The potential downside would finally acknowledge long-term damage to the iconic brand as a result of the pandemic and tens of millions of job losses. Specifically, those folks won't have the resources to keep up with the company's endless upgrade cycles, instead choosing to apply limited funds to household essentials.

The stock's price-to-earnings ratio (P/E) has lifted to a lofty 30 in recent weeks, despite obvious headwinds. More importantly, speculation by so-called "Robinhood traders" has driven much of the upside, with younger Americans using stimulus checks to open commission-free trading accounts. The upside explosion in the tech-heavy Nasdaq 100 reflects this speculative fervor, widening the performance spread with the S&P 500 to historic levels.

Mean reversion has proven to be the market's most reliable force in the past 100 years, with counter-trends alleviating extreme price action to the upside or downside. We saw this mechanism in all its glory after the March lows, with extremely oversold technical readings yielding one of the strongest rally impulses on record. However, the sword cuts both ways, and the same technical measurements have now lifted into extremely overbought readings.

Market insiders also view the Robinhood crowd as "dumb money" despite their short-term profits, setting the stage for hedge funds to directly target this supply in an effort to empty their growing accounts. The strategy shouldn't be too difficult because the vast majority of these folks have no risk management skills. We've also been here before – in 1987, 1999, and 2007 – although we really don't know how things will turn out this time around.

Apple Long-Term Chart (2007 – 2020)

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

Apple stock broke out above the 2007 high in the upper $20s in 2010, entering a strong uptrend that topped out just above $100 in 2012. A decline into the 50-month exponential moving average (EMA) found support in the second quarter of 2013, while the subsequent uptick hit new highs about 18 months later. It topped out once again in the $130s in 2015, while the subsequent pullback ended at the same moving average in 2016.

That support level worked just as efficiently for the third time in December 2018, setting the stage for a November 2019 breakout that stalled above $320 in February 2020. The stock posted a higher low in March and turned sharply higher into the second quarter, breaking out once again in June. This buying impulse posted an all-time high on Monday, ahead of a wide-range intraday reversal that could signal the end of the current rally wave.

Apple Short-Term Chart (2018 – 2020)

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

Price action since December 2018 has carved a classic Elliott five-wave rally pattern. Admittedly, the structure fulfills most but not all of Elliott's requirements because the bottom of the fourth wave overlaps the top of the first wave, which "shouldn't" happen. However, this occurs frequently in the real world because support and resistance levels have widened due to the influence of algorithmic trading routines in the past two decades.

Parabolas and buying climaxes are closely associated with the fifth wave, and Apple's 2020 action is no exception. It's the longest of the three impulse waves by a wide margin and hasn't carved a single major support level between the inception at $212 and the (unconfirmed) termination at $400. In turn, this can yield volatile downside action that has the potential to give up 100% of the final rally wave.

While it's too early to look at worst-case scenarios, shareholders and other interested parties should pay close attention to price action near the rising 50-day EMA at $340, which would mark a first downside target if selling pressure continues. If that level breaks, the red line at $328 will mark the bulls' line in the sand because a violation would generate a failed breakout that sets off an additional round of sell signals.

The Bottom Line

Apple stock may be close to a long-term top that won't be challenged for months or years.

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