Chart Shows Apple (AAPL) at High Risk Short-Term

Michael Kahn, CMTby Michael Kahn, CMT

It is common sense to invest with leaders as long as the market is not in a frenzy. Apple has been one of those leaders and the company keeps itself as fresh and innovative as any other. Indeed, the stock has been outperforming the broad stock market – not just during the current bull market that began in 2009 but all the way back to just after the tech bubble burst in 2000.

From a technical point of view, the trend in long- and short-term time frames is up. As they old saw goes, the trend is your friend. Apple has been everyone’s’ BFF (that’s best friend forever in texting shorthand).

Apple Tech Analysis chart 01.24.2012

But investing is a bit more than finding a great company and a rising trend. When we put our money down to buy shares we must be sure they are still a good value. In other words, paying $100 for a $60 stock is not a good move no matter how great the company behind it is.

Apple closed Tuesday near all-time highs and analysts have one-year price targets of well over $500. (It jumped to $454 after hours on another solid earnings report). They may be right. After all, Apple’s trailing price/earnings ratio sits at 15, which seems reasonable for the number one tech company there ever was.

But the market itself is not as convinced. While the stock just enjoyed a solid two-month rally, the flow of money into the stock has been questionable. What that means is that buying enthusiasm was not as great during the November-January gains as selling enthusiasm was during the October-November losses. Prices made new highs while technical indicators measuring money flow did now and chart watchers call this a bearish divergence.

Put another way, it seems that the stock went up over the past few months not because of an abundance of buyers (demand) but a lack of sellers. It creates a condition in which a sudden increase of shares for sale (supply) can cause a stampede for the exit doors resulting in quickly falling prices.  The natural buffering power of an active, two-way marketplace would be missing.

It is not a forecast but rather a warning that Apple stock is in a high risk environment in the short-term. It would not be a surprise to see prices drop to November lows near 364 before picking back up again.

If and when that happens, we’ll have to see how the stock handles itself. If the analysts are right and Apple continues to innovate then the stock should bounce back quickly. It would mark a great buying opportunity, indeed.

But if something changes, such as a disappointing product release or major downturn in the economy, then our hero for the past decade may take a serious fall. The way the market is acting now suggests that it can see this happening.

Michael Kahn, CMT, writes the twice weekly Getting Technical column for Barron’s Online and publishes the daily Quick Takes Pro newsletter. Sign up for his free, no-spam technical analysis chart of the day at

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