Has Apple Gone 'Parabolic' Or Just A Bit Overextended?

Feb.13.12 | About: Apple Inc. (AAPL)

Some of the opinions I read in both comments and articles on Apple (NASDAQ:AAPL) wonder about the stock's rise last week, with speculation on whether the sharp move to the upside was "parabolic."

The stock began the year at around 410 and closed Friday at 493.42 - a gain of more than 20%.

Is that a "parabolic" move? You could look at it that way, but that term isn't very precise. It implies some sort of exponential movement, and it's not uncommon to see this stock (and others) move up rapidly then run out of steam for awhile.

I do think the stock is "overextended," and to explain why, I'll show you one way I view stocks - in terms of something called Guppy Multiple Moving Averages, which were introduced by technical analyst Darryl Guppy.

I don't use these multiple moving averages the way Darryl Guppy does, nor do I use the same set of averages, nor do I even read Darryl Guppy's commentary. Heck, I'm not even a big fan of technical analysis to begin with.

But I've adapted his concepts in setting up the default view on my StockCharts.com account because it gives me a lot of at-a-glance information without a lot of cluttered indicators.

So here is what I see when I call up a chart of Apple on StockCharts.com:

Click to enlarge

You'll notice eight different moving averages in this chart, four short-term averages (in purple) and four longer-term moving averages (in gold). The gray line shows the 200-day moving average.

Although I don't pay much attention to the averages themselves, this view suits my need for that at-a-glance "gestalt" sort of view of what's going on with a stock in terms of price behavior. As such, I don't feel the need to use any other fancy indicators.

Note how the gold lines tend to merge, then separate as the stock moves up.

This gives me an idea of the trend, if there is one, so I really don't need any trend-oriented indicators. The stock seemed to be mostly trendless in early 2011, but that seems to have changed.

Also note how the purple lines, representing short-term movement, tend to dance around the gold lines. The purple lines also separate and move up, but they will always crash back down into the gold lines from time to time - indicating a pause.

This gives me an idea of whether the stock seems overbought or oversold. No need for any fancy moving average convergence indicators, oscillators, etc. I can see the convergence or divergence just fine in this view.

No, it's not perfect, but nothing is. In any case, those purple lines are quite far apart now on Apple's chart, so yes, I'd say the recent move is overextended - or it was as of Friday. If those purple lines start crashing back into the gold lines, the stock could easily trade back down into the low 400s. Or at the very least, it wouldn't surprise me.

Investors Just Discovering Apple?

Fundamentals, of course, trump purple and gold lines on a chart. Although it's tempting to view the price action in terms of what the purple and gold lines are "doing," they're not influencing the price of Apple in any way at all. Quite the opposite in my view.

Yes, Apple's earnings were incredible last quarter. But the stock has always been "cheap" given its earnings and healthy balance sheet. Have investors finally "capitulated" in buying the stock? That seems hard to believe, and besides, this stock isn't even really in that much of a long-established trend anyway.

Compare the chart above to that of McDonald's (NYSE:MCD):

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Here you can see again what I mean about the relationship between the shorter-term averages in purple and the longer-term averages in gold. The gold lines fan out, then compress. The purple lines go up and down, sometimes crashing into the gold lines.

So until further notice, the trend in McDonald's is way more reliable than Apple's - even though MCD has gained about 35% since January 2011 while Apple has gained close to 50%. And while I'm not saying one stock is any better than the other, a good portion of Apple's total move since early 2011 came during the last two weeks.

Finally, let's compare both of these charts to Cisco (NASDAQ:CSCO):

Click to enlarge

Note the relationship between the gold and purple lines as CSCO dropped from 22 to 14. Selling the stock when the purple lines moved into the gold lines would have been a good idea. But now things have changed, and the stock appears to be in an uptrend. When fundamentals change, so do technical indicators like a whole bunch of moving averages.

So there you have it from my point of view. Gold lines fanning out as a stock moves up. Purple lines crashing back down into gold lines indicating a pause. And Apple is due for a pause.

The good news is that if Apple's move is or was "parabolic," it should give buyers a chance to get in at lower prices sometime soon. And a good benchmark might be when those purple lines meet those gold lines once more. It's not a matter of if, but when.

Disclosure: I am long AAPL, MCD, CSCO.