William Tell hit the apple balanced on his son's head, but Apple missed earnings targets last week. This coupled with management changes has created some down pressure for Apple. Is this a buying opportunity or the end of a trend? Chart analysis takes the guesswork out of the answer.
There are three features in the analysis — GMMA; MACD; trading channel.
The most powerful feature is the GMMA indicator. The Guppy Multiple Moving Averages (GMMA) display uses two groups of moving averages. The short term group shows the activity of traders. The long term group shows the activity of investors.
The long term GMMA is well separated. It acts as a shock absorber every time there is a retreat. The consistent separation shows investors come in to the market as buyers whenever price weakness develops. In recent weeks when bad news has hit Apple there has been no evidence of investors selling. The long term GMMAs have remained well separated and even the short term trader group of averages has shown little reaction to these news events. This suggests a stable, well established, strong trend.
The MACD indicator provides a reliable guide to entry points. Using a simple MACD crossover system provides good entry points on price retreats and rebounds and good exit points for traders who want to take short term profits. A major sell signal is delivered when the MACD creates a bearish crossover and when this crossover is below the zero reference line.
These first two features give the context of the Apple trend. The third feature provides better tactical trading solutions. The uptrend is defined by a trend line. This captures the breakout above resistance near $190. The upper trend line is almost parallel to the lower trend line. There is a slight broadening of the channel, but it is too small to be significant.
The result is an up-sloping trend channel. This is a powerful trending situation. The trading strategies are simple. Traders buy as the price moves towards the lower trend line and develops a rebound. Traders sell when the price clusters around the value of the upper trend line in the trading channel. This gives short term trades between $320 and $410 delivering a 28 percent return.
The trend channel provides a longer term trending solution so investors hold onto the stock and the price retreats from the upper edge of the trading channel. This method has taken investors from $190 to the current $410 levels for a 115 percent return. Management started with GMMA analysis and was confirmed once the lower trend line could be reliably located.
These analysis methods do not provide a target for the continued trend rise. We can project the value of the upper edge of the trading channel and use this to calculate future targets but this does not provide a time frame or an exit point. This is an old fashioned trend trade. The trade is closed when exit signals are generated by the indicators. These include a strong move below the lower trend line. This is combined with an MACD crossover signal and compression in the long term GMMA group of averages. Until these signals develop this stock remains the apple in the eye of many investors.
Daryl Guppy is a trader and author of Trend Trading, The 36 Strategies of the Chinese for Financial Traders – He is a regular guest on CNBC's Asia Squawk Box. He is a speaker at trading conferences in China, Asia, Australia and Europe.
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