Dow component Apple Inc. (AAPL) has stunned complacent shareholders in the past two months, selling off more than 60 points after hitting an all-time high just above $233. Bounce attempts have failed miserably throughout this troubling period, forcing dip buyers to stop out or incur steep losses. And ominously, long-term relative strength readings haven't reached oversold levels yet, raising the specter of even lower prices into 2019.

However, take a giant step back from the short-term mayhem, and it's clear that the long-term uptrend remains fully intact. In fact, the stock is still trading well above the 50- and 200-month exponential moving averages (EMAs), which mark primary dividing lines between bull and bear market impulses. In turn, this multi-year price structure predicts that the current downturn will eventually offer a historic buying opportunity, on par with dramatic turnarounds in 2009, 2013 and 2016.

How can short-term price action feel so bad while the long-term outlook looks so bullish? It's a matter of proportionality, a poorly understood technical concept that's perfectly stated in the market adage "the bigger the move, the broader the base." Apple stock rallied more than 160% in little more than two years and now needs to shake out late-to-the-party shareholders, hitting the reset button before starting the next bull run.

AAPL Long-Term Chart (2008 – 2018)

Technical chart showing the performance of Apple Inc. (AAPL) stock
TradingView.com 

The stock bottomed out at a split-adjusted $11.17 in January 2009 and took off in a historic uptrend that stalled at $100 in September 2012. It fell more than 40% into April 2013, built a base on the 50-month EMA and took off in a rally that exceeded the prior high by 34 points at the 2015 top. The subsequent decline stretched more than 30% in 15 months before finding support at the 50-month EMA for the second time in three years.

The downturn that started in October 2018 has sliced 28% or so off Apple's price in just two months, which is a lower percentage and a shorter time frame than 2013 or 2016. However, the depth of the correction is getting into the vicinity of those declines, implying that a tradable low will come between $140 and $160. Of course, other factors can affect the eventual turnaround, which brings us back to the topic of proportionality.

The rally wave that started in 2016 carried 144 points, compared with 79 points for 2013 to 2015 and 90 points for 2008 to 2012. The bigger move suggests a broader base this time around. A Fibonacci retracement grid stretched across the decline offers a logical method to evaluate pullback potential as well as uncover hidden buying signals. This is especially true when grid levels align with other chart properties.

The 50-month EMA has now lifted into the .618 sell-off retracement level, highlighting strong support around $150. A reversal near that price zone would track the 2013 and 2016 reversals, suggesting that new long positions will benefit from a dramatic recovery wave. That ending point would also bring the correction's percentage in line with prior downturns, adding predictive power.

Time and cycle analysis also tell prospective buyers to remain in defensive mode for now for three reasons. First, the correction has lasted just two months, which is much shorter than the 2013 or 2016 incarnations. Second, Apple shares spent three to four months completing basing patterns after printing the lowest lows in prior events. Third, the monthly stochastics oscillator remains glued to a sell signal that hasn't reached the oversold level yet (rectangles). It didn't matter in 2016, but that correction lasted much longer than the prior one.

The Bottom Line

Apple stock remains in a long-term uptrend, but it doesn't look like the current correction has reached time or price targets. As a result, smart traders and beaten-down shareholders may wish to sell the next bounce and wait for a lower low that matches technical targets.

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