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Forecasting Apple Using Evidence-Driven Technical Analysis

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From its 9/21/2012 high of 705.07 to its 4/19/2013 low of 385.10, $AAPL traced out a fascinating wave structure that quickly captured the attention of many a technician in the Elliott Wave landscape. Having profited handsomely from an exhilarating bull run during which the stock price almost doubled from its 11/25/2011 low of 363.32, retail investors and traders turned to the technicians for answers to their incurable addiction. After all, it's $AAPL, and according to Topeka Capital's Brian white, it was on its way to $1,111. 

And the technicians obliged. At one time in early 2013, I recall seeing as many as a dozen different wave analyses, none of which bore a resemblance to another. Some were even published in video format and updated weekly, sometimes daily. The 'Rolls Royce' of them all was narrated by a sweet-sounding female with a warm, assertive British accent making a dire prediction of $200/share in the coming months. (No offense to my British friends and followers, many of whom are brilliant chartists.)  

I too was fascinated, and at the same time obsessed, by the stock's reversal of fortune. After all, it had just reached the measured move of an inverse Head-and-Shoulders continuation pattern that unfolded from early April to early August 2012. And thus I embarked on a daunting journey to track the wave progression on as small a time frame as the 2-minute. (Available on request).

Technical Analysis: What It Is

In part, technical analysis is the art and science of chart pattern recognition. If a pattern at hand has historical precedent, the post-pattern behavior can be determined with a reasonably high degree of predictability. (Isn't this how lawyers argue their cases?)

Elliott Wave Theory is a catalog of chart patterns. It includes patterns such as the 5-wave impulse, zigzag, double / triple zigzag, double / triple combination, contracting / expanding / barrier triangle, terminal/leading diagonal, etc. 

Conventional technical analysis too has its catalog of chart patterns. It includes things like the head and shoulders, cup and handle, broadening formation, triangle, wedge, flag, rectangle, rounding bottom / topand more obscure structures like the bump and run, among many others. Of course, let's not forget the rich catalog of Japanese candlestick patterns entailing 1-line, 2-line, and up to 5-line (or more) patterns. By far, the most complete reference site for patterns is Bulkowski's thepatternsite.com

Other chart pattern catalogs include the Fibonacci-based harmonic pattern lineup, among which are the GartleyCrabBatShark, cypher, etc.

Evidence-Driven Analysis: The Decline

As far as the decline from the 9/21/2012 high of 705.07 to the 4/19/2013 low of 385.10, the wave structure, according to the analysis I conducted on the the 3-minute (sometimes 2-minute) time frame, unfolded as a triple zigzag. Referring to the chart below, many technicians might eyeball the decline pattern and deem it to be a single zigzag. However, the truth is in the details. 

Exhibit 1 

The decline unfolded as an Elliott triple zigzag. Since according to Elliott Wave Theory there's no such pattern as a quadruple zigzag, the correction must have ended at the April 2013 low of 385.10.  

On 11/16/2012, the stock market put its finishing touches on a multi-week decline and then embarked on a non-stop rally for the next thirteen months. On that same mid-November day, $AAPL left behind a massive bottoming tail in the form of a hammer candlestick. The range on that day was huge, and so was volume, leaving many a trader wondering if the bottom is finally in place. As it turned out, the ensuing rally lasted only two weeks, and retraced no more than 61.8% of wave a. This countertrend rally (or corrective bounce), Wave b, conveyed an important message that went unnoticed.

Exhibit 2

Wave b unfolded as a double combination (See chart below). According to Frost and Prechter, The Wave Principle, page 51, "a triangle may occur as the final actionary pattern in a corrective combination... Although even then, it usually precedes the final actionary wave in the pattern of one larger degree than the corrective combination."  (page 51.)

Referring to the chart below, the countertrend rally that unfolded between 11/16/2012 and 12/03/2012 subdivided internally into a double combination (W-X-Y or abc-X-abcde). The first combination was an abc zigzag (labeled wave W), followed by a partial pullback (labeled wave X), and then a final rally that unfolded as an abcde triangle top (labeled wave Y). This satisfied the first part of the statement which says that only the 'last hurrah' in the direction of a corrective pattern may unfold as a triangle. 

The second part of the statement is just as important. It says that if a corrective pattern within an established trend culminates in a triangle, the next leg in the direction of the established trend should be the final one, and thus should give way to  a trend reversal. $AAPL has been in an established downtrend since 9/21/2012. Having reached an unprecedented oversold condition on 11/16/2012, it staged a countertrend rally whose last component was a triangle. This implied that the downtrend was ready to deal its final card (i.e., has only one final leg to go) before giving way to a trend reversal. This would be wave c. (Top chart.)

Given the evidence presented in Exhibit 2, how far down will this final leg reach? The inverted cup in the chart above provided the first clue, followed by the green falling wedge in the top chart. The latter had a downside objective of roughly 372. The day Steve Jobs died, October 5th, the stock closed at roughly 378. Ironically, Steve Jobs' passing ignited the most breathtaking rally in the company's history, one that would see the stock double in just ten months. But then a few months later, the chart was casting a no-confidence vote by giving back all the gains. 

Growth was decelerating. Innovation was perceived to be lacking.

Evidence-Driven Analysis: The Recovery

The first rally - With sentiment at an all-time low, the Bat harmonic pattern (top chart, in purple) was probably the first technical indication that a sustainable bottom may finally be in place. The first rally from the bottom of wave c had an impulsive look. Sentiment was improving. Hedge funds were accumulating. And then the double bottom setup was technically confirmed when the 5/7 high of 465.75 was taken out shortly before Carl Icahn announced he's buying a large stake in the company. In Elliott speak, waves 1 and 2 were in the books, and wave 3 was underway. 

The second rally - The third wave reached as high as 514 before relinquishing control to the sellers who drove the stock back down to 447.50. Given the deep pullback that breached the zone of wave 1, Elliotticians rushed to re-label their waves as shown below. You see, according to Elliott's rules, wave 4 is not supposed to breach the zone of wave 1 unless a diagonal, not an impulse, is unfolding. But once again, Elliotticians misinterpreted the wave structure by re-labeling what was to be wave 3 as wave 1 of wave 3.

The third rally - The stock staged a swift recovery from the 447.50 low, surprising everyone by taking out the pre-earnings high of 513.74 to reach as high as 539.25. The double-bottom's target of 542 was within striking distance and was only to be reached momentarily on a spike to 542 in reaction to earnings in late October. The stock then spent the next month consolidating before finally flashing a buy signal in the form of a 5 percent day. A 5 Percent Day occurs when the entire day's range is established during the first 60 minutes of trading. This happened on 11/22, as shown on the  market profile chart below. Whenever this happens, traders should trade in the direction of the breakout from the 5 percent day's range. In short, the stock mounted a fierce 60-point campaign in just two weeks, reaching as high as 575.14.

Exhibit 3

The final rally began from the 513.67 low of November 21st. Its wave structure is shown below. Wave 3 achieved a size of roughly 4.764 x wave 1, and wave 5 traced out an expanding diagonal. According to Frost and Prechter, The Wave Principle, page 37, "An ending diagonal occurs primarily in the fifth wave position at times when the preceding move has gone too far too fast... In all cases, they are found at the termination points of larger patterns, indicating exhaustion of the larger movement."




Exhibit 4

The expanding diagonal (i.e., a broadening wedge, in conventional chart pattern parlance) was retraced in its entirety, and then some, as can be seen in the chart above. According to Frost and Prechter, The Wave Principle, page 38, "A rising ending diagonal is usually followed by a sharp decline retracing at least back to the level where it began and typically much further." 

Where to from Here

Everyone seems to be watching the broad-based cup forming on the daily chart, overlooking several important details. In the very top chart, the reader must have noticed the rising wedge labeled 1-2-3-4-5. The chart below zooms in on the structure.  What I believe we have at hand is a leading diagonal in the wave (1) position of one larger degree of trend. 

Exhibit 5

The diagonal subdivided into a 5-3-5-3-5. According to Frost and Prechter, The Wave Principle, page 40, "It has recently come to light that a diagonal occasionally appears in the wave 1 position of impulses and in the wave A position of zigzags. In the few examples we have, the subdivisions appear to be the same: 3-3-3-3-3, although in two cases, they can be labeled 5-3-5-3-5, so the jury is out on a strict definition. Analysts must be must be aware of this pattern to avoid mistaking it for a far more common development, a series of first and second waves... A leading diagonal in the wave 1 position is typically followed by a deep retracement."

Exhibit 6

If the wave interpretation in the chart above is correct, wave (2) will retrace 78.6% of wave {1). According to Frost and Prechter, The Wave Principle, page 135, "A leading diagonal in the wave one position is typically followed by a zigzag retracement of 78.6%." 

OK, and Then What?

It takes a lot of nerve to go against the crowd, but trading is all about probabilities, not certainties. An objective, evidence-driven analysis tends to put the odds in one's favor. The chart below depicts the forming rounding bottom (or cup) that the crowd is seeing. BUT WE ALL KNOW WHAT HAPPENS IN MARKETS WHEN CONSENSUS IS CROWDSOURCED

The chart below also depicts my personal interpretation and forecast for the coming months and years. The pattern that I believe is currently unfolding is a Crab harmonic. Its ideal target (aka. PRZ) is shown to be in the vicinity of $900/share. Elliott wave (2) in the chart above should correspond to point C in the chart below.

Evidence of Exhaustion

I'll conclude this article by presenting palpable evidence of trend exhaustion. The first of two charts below depicts a Tom DeMark 9-13-9 Sequential Sell count. The bottom and final chart shows last week's close registering a Tom DeMark bearish price flip on the weekly time frame, occurring in concert with a cyclic 7-wave momentum exhaustion pattern.

Evidence of Liquidation

I'll conclude this article with the market profile chart below, depicting a mind-boggling series of b-shaped auctions, occasionally interrupted by a short-covering P-shaped auction. 

Trade smart and good luck,

Peter

 

If you found my analysis thorough and actionable, consider subscribing to my TradeWinds service on 61point8.com for an ongoing analysis of the U.S. market indices and a steady flow of trade setups. As always, you can continue to enjoy my occasional free contributions on Twitter and StockTwits by following @PeterGhostine. My StockTwits page is http://stocktwits.com/PeterGhostine.

The information in this article represents the author's own unbiased technical interpretation of the price charts and other data associated with the security or asset class in question. It does not contain an investment recommendation or offer to buy or sell any particular security. Please read our full disclaimer here.

 

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