No Leadership from Apple Right Now

Aug.27.08 | About: Apple Inc. (AAPL)

We’re getting to that time of year where volume historically drops off, and the action is light. As an investor, this is a frustrating period because you want to commit, you can see the setup, but neither the Bulls nor the Bears have the guts to take the other over line. So all you can do is wait, and wait, and friggin wait.

The number of shares traded for Apple (NASDAQ:AAPL) was incredibly low. You’d have to go all the way back to the day before Christmas last year to find a comparable volume, and that was a half day! The other problem is that the markets are trading in a very tight channel, bounded by strong support  and resistance lines. And until there’s a break out of that channel, we’ll continue to drift along.

Typically you would see a leader in the pack, like AAPL or one of the other horsemen, like Research in Motion (RIMM) or Google (NASDAQ:GOOG), show the way. But there’s no such leadership right now. Please don’t get aggressive here, within such a tight channel you can get slaughtered. It’s better to wait for the break, and it will come, whether it’s up or to the downside - then get aggressive.

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The channel that has developed for AAPL is what I have characterized in past posts as a Pennant pattern. A Pennant is a consolidation pattern which typically precedes a bullish advance. In this case it may not be so typical due to market forces. Within the pattern we have support around 171.50 and resistance in the 176.50 to 177 range. In my opinion the favor is to the down side, because we have both the 20 and 50 day moving averages riding inside the pattern, providing additional resistance above current price action at 174.56 and 17.96 respectively. They have bounded upside action for the past 2 trading sessions, and may continue to do so.

While the patterns on the Nasdaq and S&P are similar to the one around AAPL, I would characterize them more like a Falling Wedge, which is a reversal pattern, but without the confirmation of a positive divergence (at least on the daily charts, weekly charts are another story). Although the Naz is much closer to AAPL, which reflects the recent strong uptrend of the Tech sector a couple weeks back, the S&P had no such advance.

The trading ranges we’re dealing with on the indices are as follows: The S&P is bounded by 1290-1310 resistance on the upside and 1260 support on the downside. The Naz is bounded by 2400 resistance and 2360 support. We breached 2360 Tuesday only to barely recapture it in the last hour of trading. As I said, I believe the markets favor the downside, but the Bears have shown no ability to take the market down when they had the opportunity.

As a trader, you need to have patience here. Let the market reveal which direction it intends to take. It will be come apparent when the conviction returns because volume on one of these levels will be breached and volume will pick up. Patience is truly a virtue in this case. How long will the wait last? Dunno. Maybe we’re waiting for after Labor Day when everyone is back from their vacations. One thing of which I’m certain, when the break occurs, hit hard and you will more than likely be rewarded.

Disclosure: Long Apple