Apple Inc.: AAPL Stock Could Be in a World of Technical Hurt

Shares of technology giant Apple Inc. (NASDAQ:AAPL) dropped on Monday to start the week, which resulted in a break below a key technical support area. Considering AAPL stock has the world’s largest market capitalization and is the most closely followed stock, a break below key technical support areas can be all the more important and could result in an acceleration of momentum lower.

aapl stockWhile an acceleration lower in Apple doesn’t have to happen immeidately, from a risk management perspective, Monday’s price action in AAPL shares should have active investors and traders sitting up and taking notice.

When Apple reported its latest earnings on July 21, the company’s earnings and revenues both came in above analyst expectations. Both figures also grew meaningfully on a year over year basis, but with any growth company, investors more often than not are more concerned with the rate of change of growth. As such, when news broke that the company sold fewer iPhones than expected in the latest quarter, investors sold the stock by more than 4% the following day.

Before looking at the closer-up damage of AAPL stock, though, let’s get a little context and perspective so as to better gauge Monday’s weakness.

AAPL Stock Charts

On the multiyear weekly chart, after an initial rally in January and into February, AAPL stock began to consolidate in a choppy sideways range. This sideways range a couple of weeks ago also brought together its Bollinger bands (blue lines) to tight levels last seen in the spring of 2014. The theory is that the longer and tighter a stock’s range, the more explosive an ultimate break out of this range, be it to the upside or the downside.

All the while, upside momentum, as represented by the Relative Strength Index, had been slowing since late 2014 as it made a series of lower highs. With Monday’s selling, AAPL stock broke below its lower Bollinger Band and out of the multimonth consolidation phase (blue box).

Apple weekly chart
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On the daily chart, we see that the lower end of the multimonth trading range also coincides with the 200-day simple moving average (red line) as well as with horizontal support (previous resistance), as represented by the black dotted line. AAPL stock had several attempts to break higher since February, but note that each attempt was quickly followed by selling (i.e., rejecting those highs). I marked those highs with the red arrows.

After the July 21 earnings report, AAPL stock gapped down the following day, which also took any remaining upside momentum out of the stock and set in motion a selling spree that on Monday led Apple to break below the aforementioned confluence support area. On Monday, AAPL shares traded below their 200-day MA for the first time since September 2013.

Apple daily chart
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With obvious support for AAPL stock now broken, active investors and traders could look to marginally get short or buy protective puts for a move into the $110 area. The risk to this trade is that the break of these support areas was just a bit too obvious and that investors and algorithms will soon aggressively buy the stock again.

As such, any major bullish reversal day in coming days would call off the bearish setup until momentum again points lower.

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Successful trading and investing starts with a plan. Download Serge’s essential trading plan, The Essence of Swing Trading e-book. As of this writing, he did not hold a position in any of the aforementioned securities.

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