The Apple chart shows an unsustainable rally. This doesn’t mean that traders cannot make money, but it does suggest that investors buying in the current market will have to ride a short-term loss before the long-term trend carries them into profit.
Buyers at the $550 level and higher are most likely to see a substantial retreat back to the upper edges of the long term trading channel, current value near $460.
Chart analysis of the Apple price action is designed to answer several questions.
1) The price objectives for the rally
2) Near term price behavior
3) The stability of the trend
The first feature of the Apple weekly chart is the well-established and stable trading channel. This is defined with an upper and lower parallel trend line. The lower trend line has been tested several times as a support level. The upper trend line has been tested many times as a resistance level. The normal behavior of Apple has been to trade inside this trading channel. The general trend is upwards, but it consists of rallies and retreats inside the trading channel.
Contrast this usual behavior with the rapid breakout above the upper edge of the trading band in recent weeks. This is a fast moving rally. It is not the beginning of a new and steeper uptrend. The targets for these types of breakouts can be estimated by projecting the width of the trading band upwards from the point of the breakout.
This projection gives an upside target near $520. This is a broad price objective that has already been exceeded. This excessive bullishness again underscores the rally-like behavior of this breakout. The price behavior of Apple does not provide a reliable technical or charting method for setting upside targets.
This suggests the near-term price behavior is a retreat back to the upper level of the long-term trading channel. On current values this is around $465. This does not signal an immediate shorting opportunity. However, once a price retreat starts then there is a high probability the price will fall and retest the value of the upper edge of the trading channel.
In the longer term the defining feature is the consistency and stability of the uptrend. In an exceptionally bullish environment, such as 2006-2007, the breakout from the trading channel can lead to the establishment of a higher parallel trading channel.
This is most commonly seen where there is a broad based bull market. This situation does not apply to the U.S. market at the moment so the development of a higher parallel trading channel is a low probability.
This suggests there is a higher probability that Apple will return to trading inside the long-term trading channel. This fall inside the trading channel is moderated by the behavior of short-term support and resistance levels.
These are shown as lines A and B. The breakout above line A then uses line A as a support level. This pattern may also develop with line B, and suggests that any retreat below the upper edge of the trading channel will find support near $420.
This is not market to short at the moment. It is a market where short term profits need to be protected in the fast rally. It is a chart behavior that suggests prices will retreat to the upper edge of the trading channel and provide an opportunity to join a continuation of the longer-term uptrend.
Daryl Guppy is a trader and author of Trend Trading, The 36 Strategies of the Chinese for Financial Traders –www.guppytraders.com. He is a regular guest on CNBC's Asia Squawk Box. He is a speaker at trading conferences in China, Asia, Australia and Europe.
If you would like Daryl to chart a specific stock, commodity or currency, please write to us at ChartingAsia@cnbc.com. We welcome all questions, comments and requests.
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