Apple shares AAPL, -1.21% have stabilized just above multi-month lows, but this slideshow of charts warns that not only should investors be weary of buying the stock, but that a further selloff into bear-market territory could be right around the corner.
First is an impending bearish “death cross” pattern, in which the 50-day moving average crosses below the 200-day moving average. This pattern is seen by many as marking the spot that a shorter-term decline graduates into a longer-term downtrend.
While the validity of the “death cross” has been widely debated, the last time one appeared, just as the stock was pulling back from record highs, the stock fell another 27% in four months.
Based on the current trajectories of Apple’s 50-day and 200-day moving averages, a “death cross” should be confirmed in a little over a week, or at least by the end of the month.
The fact that so many “death cross” patterns have appeared recently in major market indexes as well as in individual stocks for the first time in nearly two years suggests the current broad market weakness is different than the short pullbacks that occurred earlier this year, and in October 2014.
Adam Sarhan, CEO of financial advisory firm Sarhan Capital, said he turned bearish on Apple’s stock earlier this month, after being bullish for about 1 1/2 years, because it broke below key support, including the 200-day moving average.
“When you see a major break in a stock like Apple, that means the big institutions are selling, not buying the stock,” Sarhan said in a phone interview with MarketWatch. “We saw this in 2012.”
Sarhan sees the next support area around the January lows below $105.
That would put the stock below the bear market threshold–a decline of at least 20% from a significant high, which was $133 on Feb. 23 in Apple’s case–of $106.40.
“Until the technical damage is repaired [with a rise back above the 200-day moving average], the path of least resistance is down,” Sarhan said.
Before the “death cross” was ever a worry, there were multiple bearish reversal signals that warned investors not to buy Apple’s stock above $130.
There was a “key reversal day” on April 28. The stock opened at $134.46, above the previous session’s intraday high of $133.13, then reversed ground to close at $130.56, below the prior session’s intraday low of $131.15.
Candlestick chart watchers also refer to these patterns as a “bearish engulfing.” Read more about “bearish engulfings.”
By any other name, chart watchers sees these patterns as warnings that the stock has peaked.
July 21 wasn’t technically a “key reversal day,” since the stock didn’t open above the previous session’s high, but the sharp intraday reversal still qualified as a “bearish engulfing.”
With two similar patterns marking highs for the stock around the same level, technicians would likely say, shame on investors who try to buy at that level.
Technicians often use volume to validate a trend—an uptrend accompanied by increasing volume would appear to be stronger and have more support on dips than an uptrend accompanied by decreasing volume.
The chart above not only shows a break of an uptrend line, it also shows that participation during the stock’s rally has been waning for some time. While this doesn’t suggest a decline is coming, it does warn against trying to pick a bottom once a pullback begins.
In addition, the trend of declining short interest, or bearish bets on the stock, warns of a lack of downside support. The idea is, the more bearish bets there are on a stock, the more buyers there will be as bears cash in.
The stochastics indicator compares a stock’s closing price to its price over a specific period of time, with the idea that in an uptrend, the closing price tends to be near the high of the day, according to the Market Technicians Association. Technicians often use the stochastics indicator to show overbought and oversold conditions, and show when the momentum of a trend is about to turn.
Over the last six months, Apple’s stock and the stochastics indicator tended to peak at about the same time.
What’s worrisome about the current reading of the stochastics indicator is that it’s about to turn lower from a relatively high level, even with the stock struggling to gain any traction.
There’s a saying on Wall Street: “If you buy and buy and the stock doesn’t go up, look out below.”