If an Apple (AAPL) Drops, Does the Whole Tree Fall?

AAPL is an important bellwether, but it's not the be-all and end-all

   

Apple (NASDAQ:AAPL) has been a major driving force in the market for the past few years. In fact, AAPL became such an overweight component of the Nasdaq 100 that the exchange announced it will be re-weighting the index to reduce the impact AAPL has on the index from 20.5% to 12.3%, beginning May 2. But even with this reduced exposure, the question is…if AAPL drops, does it mean the market is going to drop as well?

It’s a timely question because AAPL just broke through another support level yesterday.

Apple (AAPL) Breaks Support

AAPL has been falling since it reached its peak in late-September, and yesterday marked the break of yet another support level. As you can see in Figure 1, $420 had been serving as support since the beginning of March.

AAPL417 1 If an Apple (AAPL) Drops, Does the Whole Tree Fall?

But this wasn’t the first time $420 showed up as an important price level for AAPL. This level first served as resistance during September and October 2011 and then as support in January 2012 (see Figure 2).

AAPL2417 2 If an Apple (AAPL) Drops, Does the Whole Tree Fall?

It was the break above $420 that kicked the AAPL bull run into full gear. So the fact that this level has now been broken to the downside is cause for concern for any AAPL investors who still hold on to hope that the stock is bound for a quick recovery.

But does AAPL breaking this key support level really mean we should be worried about a potential bearish pullback in the market in general? After all, hasn’t AAPL been falling all year while the S&P 500 has been climbing to higher highs?

Apple as a Bellwether

AAPL dropping below key support does not guarantee the S&P 500 is going to turn around and move lower. No one stock – not even AAPL – wields that kind of power. However, AAPL is a bellwether that is important to watch because of what it symbolizes. Hedge fund after hedge fund, not to mention retail trader after retail trader, jumped into the bullish trade on AAPL during the past year, and now anyone who entered the trade after the beginning of 2012 is upside down on their position. That is a huge reversal of fortune, and reversals of fortune like that tend to have a negative impact on investor confidence, which is exactly what the market does not need right now.

At the time of this writing, the S&P 500 is challenging the low closing price for the past month (see Figure 3), and if sentiment turns any more bearish, we could be in for quite a correction.

SP417 3 If an Apple (AAPL) Drops, Does the Whole Tree Fall?

Investor Place advisors John Jagerson and S. Wade Hansen are co-founders of LearningMarkets.com, as well as the co-editors of SlingShot Trader, a trading service designed to help you make options profits by trading the news.  Get in on the next trade and get 1 free month today by clicking here.


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