Chart of the Day: Apple’s Rise Was Dead Cat Bounce; Shares Headed Lower

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Apple (NASDAQ:AAPL) is scheduled to release its Q1 2019 earnings today, after the market close. On January 2 the company shocked markets by slashing its outlook, because of weakness in China caused by the trade war with the U.S. The unexpected warning took investors by surprise; many had been hoping that the trade talks had got past the headwind that wrecked markets in the last quarter of 2018.

After the news was released, Apple’s stock plunged 8.94%, the most in almost six years. Since then, it has bounced back. The stock closed Friday at the pre-soft guidance level, around $158. On Monday however, it was dragged down again, along with the rest of the market.

Did the stock recover because investors don’t agree with Apple’s outlook and have a more positive view of the enduring trade talks? Perhaps it’s simply that at the $140 levels the stock fell to, shares of the company suddenly became a bargain at almost 40% off its October record peak of above $230.

We believe that Apple will retest the early January low and perhaps even extend the drop. As the technicals indicate, the trading range within the rebound is likely nothing more than a dead-cat bounce, after a significant drop.

Chart of the Day: Apple’s Rise Was Dead Cat Bounce; Shares Headed Lower

Apple Daily Chart

The sharp pre-Christmas selloff, followed by the tight, gradual return are telltale signs of a rising flag, bearish in a downtrend. The upward tilt demonstrates that all available demand is being absorbed.

When there’s none left, sellers will reduce their prices below the confines of the flag to find new, willing buyers. This should set in motion a technical chain of events that pushes prices even lower.

The 50 DMA crossed below the 200 DMA during the Christmas Eve selloff, triggering a Death Cross, and the 100 DMA is about to exacerbate that signal, by falling below the 200 DMA, entering a bearish formation.

Trading Strategies – Short Position Setup

Conservative traders should wait for a new low, below the early-January trough, to confirm the long-term downtrend, before entering a short position.

Moderate traders would wait for a downside breakout, followed by a potential pullback to retest the integrity of the pattern.

Aggressive traders, depending on their risk aversion, may either wait for a downside penetration or short now.

Trade Sample:

  • Entry: $149
  • Stop-loss: $150
  • Risk: $1
  • Target: $145
  • Reward: $4
  • Risk-Reward Ratio: 1:4

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