Dow component Apple Inc. (AAPL) has struggled in recent weeks, losing ground at a rapid pace due to growing fears that China will target the tech giant in a trade war. Shareholders have taken note, selling the stock aggressively since mid-May, while the early June thrust to an all-time high set off a number of bearish volume divergences. None of this bodes well for the Cupertino, California-based icon or major indices in which the stock is a heavily weighted component.
Apple holds the 13th highest weighting in the Nasdaq-100. The tech-heavy index rallied above the March high on June 13, attracting a wave of trend followers, but the rally stalled a week later and has trapped those buyers in a failed breakout. A similar reversal in March dumped the index more than 850 points in less than three weeks, indicating that the current decline could find its way to 6,500.
The tech giant also holds the sixth highest weighting in the Dow Jones Industrial Average. The venerable instrument has struggled badly since the decline into February, failing to mount resistance at the .618 Fibonacci sell-off retracement level. The latest selling wave has already reached the 200-day exponential moving average (EMA), marking the fifth test in less than five months while raising the odds for a breakdown that will target the 20,000 level. (See also: Apple Stock: Traders Should Wait for $170 to Buy.)
AAPL Monthly Chart (2007 – 2018)
Rally highs posted since 2007 have tracked a rising trendline, while three declines during this 11-year period have found support at the 50-month EMA. The stock reached the trendline for the fourth time in November 2017 and has spent the past eight months testing resistance. Meanwhile, monthly price action is set to post a bearish reversal bar, denoting the failure of the June breakout to hold higher ground.
The stochastics oscillator crossed into a long-term bearish cycle in May 2017, but the indicator turned higher in the fourth quarter and eased into a complex pattern that is still generating sell signals. The 2009 to 2012 oscillation may offer a useful analogy when it wobbled sideways for more than three years before posting a long-term top. However, the stock had plenty of running room into the trendline at that time, unlike the current set-up, which is unfolding right at major resistance.
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AAPL Weekly Chart (2015 – 2018)
The weekly view raises red flags about third quarter price action. The red lines mark boundaries of a rising wedge pattern, which has a nasty reputation of showing up at the end of multi-year uptrends. Trading ranges contracted between 2015 and 2018, with wedge endpoints now set to cross in May 2019. Technically oriented bulls breathed a sigh of relief when the stock mounted the upper trendline in May 2018, but that elation has turned into anxiety after a failed breakout that now exposes wedge support at $170.
That price level will mark a low-risk buying opportunity, but the clock is ticking, and the failed breakout could presage a wedge breakdown that also ends the trend wave that started in 2016. In turn, that selling wave would open the door to the fourth test of the 50-month EMA since 2009, with the moving average all the way down in the $130s. It will take a breakdown through that line in the sand to declare an end to the multi-year uptrend. (For more, see: Apple Led Company Stock Buybacks During Q1.)
The Bottom Line
Apple stock reversed on heavy volume in June after mounting the top of a three-year rising wedge pattern, triggering a failed breakout that could generate continued downside into wedge support at $170. A break of that long-term support level could dump the stock to $130, placing a dead weight on the Nasdaq-100 Index and the Dow Jones Industrial Average. (For additional reading, check out: Apple to Lower Prices on New Crop of iPhones: MS.)
<Disclosure: The author held no positions in the aforementioned securities at the time of publication.>