Apple leads selloff after breaking key chart level

Key Points

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Apple shares pierced through their 200-day moving average Monday, setting up a fight between the bulls and bears this week.

This key indicator is used by technical analysts to signify a long-term positive trend. If the shares spend a few days below the 200-day average, a bigger decline could follow, according to technical analysis theory.

This happened in October 2012, when Apple's stock punched through the 200-day and went on to fall another 30 percent over the next six months before bottoming.

Apple (AAPL), 3 years

Source: FactSet

"The stock is sitting right at a critical support level," said Richard Ross, head of technical analysis at Evercore ISI.

Since reaching a recent high of $133 on July 20, shares of the world's biggest company by market value are down 9 percent, approaching correction territory.

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According to Ross, the critical level to watch is $119, which if broken, could take the stock down to $107, or another 11 percent lower from here.

To be sure, before a bearish pattern is confirmed, Ross says investors must watch where the stock closes in the next few sessions.

"The last few times we've touched these levels turned out to be buying opportunities," added Ross, referring to "false bottoms" in the past two years.

"The classic mistake investors often make is to sell the stock when it's sitting at support," he said.

The stock traded near the 200-day moving average in April 2014 and briefly broke through it in September 2013, but quickly turned higher after both instances.

In the past year, Apple shares are still up 25 percent compared with a return of 11 percent for the S&P technology sector.

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