Apple and the Major Indexes: A Technical View

The past 3-4 days I’ve been preaching caution, to go light. As the week wore on, I suggested just sitting on the sidelines until the smoke cleared. Well, there’s no denying it now that the flames are building. The S&P and Dow are unable to defend important support levels. The Nasdaq is in slightly better shape, but don’t let that resistance cloud your judgment. The reason it has been doing better for the most part is that big money is supporting it. It’s the flavor du jour in the sector rotation game, but trust me that won’t last, never does.

When Apple (AAPL) sported the bullish hammer last Friday, I was encouraged 
that we could finally start thinking about long setups. But as the
 week wore on, these setups became null and void, and proved that the 
bullish hammer failed. In large part, this failure was due to the 
breakdown of the financial sector.

The reason I started to speak of 
caution was the failure to capture the 20-day moving average on Wednesday, and then Thursday bouncing off of it hard. And then of 
course Friday gapping down on news the Merrill Lynch (MER) was in deep 
trouble, was the last straw.

click to enlarge

AAPL has failed on two separate bullish reversals. Also, it has breached its 50-day moving average. It appears destined to test support in the 170-172 area.

The market internals have completely deteriorated from where they were 
in the past several weeks, which was providing me with some confidence 
that things looked pretty good under the hood. But this past Friday
 (June 20), they were awful, even considering options expiration. The
volume was huge on the move down, and decliners outpaced advancers by
a wide margin, and new lows appeared across the board.

The Dow and S&P are racing towards their March lows. The Nasdaq has 
been a stalwart, showing remarkable resilience to the Bear’s
onslaught. But its shine is starting to tarnish as well, and fast. It 
is well above it’s March lows, unlike the Dow and S&P, but if the 
financials and other sectors continue to perform poorly, it just won’t 
be able to sustain its resistance.

The fact is big money over the 
past few weeks, at least up to Wednesday, has favored high beta growth
 companies, like Apple and RIMM. But it’s becoming apparent that the
market is ready for another sector rotation. Where? I don’t know,
 perhaps finance, although hard to imagine. But it’s going to happen
 soon.

So, here’s what I believe is going to happen. The Dow and S&P are very
 close to the March lows, only 110 points away on the Dow at 11,750, 
and the S&P only 60 points away at 1257. Those are the critical levels
to watch. The bears are determined to test those lows. At the same 
time we are very oversold. So, it appears that we will test those 
lows, but as we do, the few remaining Bulls will defend it with every
 ounce of strength they have left. At that point, we’re likely to see a bounce. If 
the bounce is weak, then we’ll go in major free fall, and there’s no 
amount of resilience that will keep the Naz or AAPL up. The Dow will 
likely seek to test the January lows.

The only hope is that the bounce has strength to it, a strong 
impulsive move up. This will be indicated by the MACD turning upward, 
then as the market corrects, the MACD needs to continue to move
 upward, creating a positive divergence, and then I can see a possible
 reversal. If not, then we are going much lower. The best advice is to 
go cash; wait to see what happens next week and watch 11,750 and 1257. 
If we put in a reversal, great. If we don’t, we’ll start talking about 
how to play a Bearish market.

Disclosure: None

Comments

[User 153665]

Excellent analysis of our current situation and the near term fall.

[batjak1]

i am buying quality stocks that are beaten up a little, BMY,PFE,COST, Visa is the only one that I am in the black with.

[marcos]

So, basically stock fundamentals regarding income, sales, profits are meaningless in the market today. Doesn't 'big money' care about these things?

[veryold]

what's with all the question marks???????????????

[jlounsbury59]

Marcos - - -

Fundamentals (income, sales, profits, etc) tell you what to consider buying and selling and technical analysis can tell you when to buy or sell and when to take no action. Not to use all tools is like to plot a three dimensional equation (x,y,z) on a one dimensional chart (x-axis only).

[Zach Bass]

marcos wrote: So, basically stock fundamentals regarding income, sales, profits are meaningless in the market today. Doesn't 'big money' care about these things?

Sure they care, but fundamentals are like the Earth's jetstream, or ocean currents, affecting the weather in the large. TA does not drive the market, it is simply an analytical method used to illustrate market/mob behavior as trends and patterns.

[John Scott]

MACD is a meaningless term unless a specific chart is identified. Even if we are to infer you meant the S&P500 chart, what time frame? Weekly chart? Daily? And are you referring to actual MACD levels or the histogram? Finally do you use (12,26,9) or some other configuration?

Be specific, please.

[Thoughtful]

In your article here from 6/20/08:

seekingalpha.com/artic...

you "disclose" you're LONG APPLE. You sold last week for a loss? Today you "disclose" that you have no position??

[Zach Bass]

In response to John Scott: I was referring to the Indices daily charts to look for a reversal in the MACD (12,26,9) and the 60 minute charts for a positive divergence. I will be more specific in future posts, thanks.

[Did U Think The Ponzi Scheme Would Last?]

Anyone that goes long on anything for any length of time until after the great crash occurs is playing with fire. We had the great moderation all right, but it was only moderated because all of the new money created from thin air and pushed into the market was sponged up by the housing bubble. Well, that game is over. It's not on hold, its over, over over. Well, all except the cry that it. After housing and the markets finish cratering because of the "financial innovation" (AKA slick Ponzi scheme) which is credited for the this great moderation of ours it will be years, perhaps a decade or more until home prices limp up to their 2005 peaks. Every time I see someone predict a recovery in 2nd H 08 or early 09 I cringe because I know that person will be a pauper in 2010.

You don't get something for nothing. We got a lot of something over the last decade and now it's time to pay the piper and there is nothing Uncle Ben can do to stop it unwinding.