Apple Inc (AAPL) fell more than 12 points during the big tech slide, posting more than twice its average daily volume, and it should bounce strongly in the coming sessions. However, the sell-off is likely to signal the start of a multi-month correction that could eventually bring the stock down to $110, shaking out a large supply of weak-handed shareholders. Current owners should consider whether or not they're financially and psychologically prepared for that drawdown.

It's natural for market leaders to complete fabulous rallies and turn over in intermediate countertrends, following the old market adage: the bigger the move, the broader the base. The tech-heavy Nasdaq 100 rose for six straight months into last week's reversal, reaching extremely overbought technical readings that significantly raise odds for extended corrective action across the broad swath of components posting all-time highs. (See also: Apple Receives Second Downgrade in a Week.)

Informed market players recognize that two-sided price action characterizes modern financial markets and will take defensive measures to protect hard-earned gains through profit taking, options plays and rotation into lower-risk opportunities. Long-term investors that own securities at much deeper price levels are better positioned when the tide turns because they can withstand drawdowns to a greater degree than the majority of folks who buy high in momentum rallies.

AAPL Long-Term Chart (2003 – 2017)


The stock found support at 91 cents (after two stock splits) at the end of the dotcom bear market and turned higher in a powerful trend advance that topped out at $29 at the end of 2007. It sold off into the lower teens during the 2008 economic collapse and turned higher in 2009, reaching the prior high just seven months later. A breakout into the new decade caught fire, lifting in a steady uptrend that stalled at just above $100 in 2012. (For more, check out A History of Apple Stock Increases.)

Price action since that time has carved a monthly-scale rising channel pattern, with resistance at the 2012 and 2015 highs and support at the 2013 and 2016 lows, and those deep levels aligned perfectly at the 50-month EMA. The uptrend that started in May 2016 finally reached channel resistance above $155 in May, giving way to last week's decline while signaling the first rejection off that significant barrier.

The monthly Stochastics oscillator has responded with a bearish crossover that will issue a major sell signal when it drops back through the overbought line at $80. Looking back, downturns at channel resistance that started in 2012 and 2015 lasted nine and 13 months, respectively. Splitting the difference, those analogs predict a correction of 40 to 50 points that lasts until the second quarter of 2018. (See also: What Moves Apple's Stock Price?)

AAPL Short-Term Chart (2015 – 2017)


The stock bottomed out in May 2016 after bouncing near the August 2015 low for the second time. The subsequent recovery wave stalled near $120 in October, ahead of the January 2017 breakout that may have ended at channel resistance in May. Apple stock posted an all-time high at $156.65 and tested that level three weeks later, ahead of a steep decline that posted the highest selling volume in 14 months while closing below the 50-day EMA for the first time since November.

This price action signals a first rejection at channel resistance, similar to the 2012 and 2015 tops, raising odds the stock is entering a multi-month correction that yields sharply lower prices in coming months. Bulls can overcome this bearish setup with a channel breakout toward $170, but that will be hard to accomplish due to the recent plunge off resistance. In turn, this shines a bright spotlight on price action in the next two to four weeks, which should tell us how much sidelined capital is ready to defend this market leader.

The Bottom Line

Apple has reversed at five-year channel resistance, raising odds for a correction that could last into 2018 and drop the stock toward $110. However, sell signals are still preliminary, offering a final opportunity for committed bulls to break this significant barrier with a rally toward $170. (For additional reading, see 3 Key Signs of a Market Top.)

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

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