Apple Inc. (AAPL): When Making a Snowman

By the time the head finished collapsing, the price had dropped to $525.62 on Nov. 15, 2012. The price then rose for a little over a week on low volume, and reached a right shoulder peak on Nov. 26, 2012 at $589.53. The price hovered at that level for about a week until shareholders lost faith and the price dropped on increased volume, breaking the neckline on Dec. 14, 2012 with a closing price at $509.79.

This established a neckline at approximately $525; support is therefore established at about $348. This indicates that the drop in price will continue for a while longer, especially given the 200 trading days or so this head and shoulders top took to form.

Another more recent and less obvious development (which I must credit Fidelity’s Advanced Chart Tool for finding for me) is the head and shoulders bottom that has formed in the past month. As shown by the chart below, this pattern is much smaller and has much shorter-term implications. In fact, it looks like the stock has already made contact with the resistance line.

As the stock price has made contact with the resistance line, it should continue its bearish trend. Below is what the two patterns look like on the same chart. This shows that the head and shoulders bottom did not have much of an effect on the downward trend indicated by the head and shoulders top.

The head and shoulders pattern is one of the most accurate and well-known patterns used to predict the extent of a trend. It is so well known in fact that it may become a self-fulfilling prophecy at times. That is to say that it is used by so many investors that it may influence their thinking to the extent that they will unknowingly force the price to the support or resistance level implied by the pattern.

My recommendation for those who wish to invest in Apple Inc. (NASDAQ:AAPL) is to wait. If the chart turns out to be correct (and history shows that it quite often is), then Apple’s stock still has another $100 to fall. The recent rally up to $450 will soon be reversed and the stock will continue to fall. The only thing likely to stop this is another change in investor sentiment brought on by a very positive earnings release for the second quarter or perhaps a new product announcement.

If Apple Inc. (NASDAQ:AAPL) announces a large dividend increase, as many speculate it will, it will likely be as a last resort to stop a falling share price. This could delay the drop to the support line at $348, but is unlikely to stop it in the long run. Apple’s fundamentals are strong, but investor sentiment is equally strong against the stock. This is the reason the stock has dropped 35% in the past six months. Don’t fight the charts just because you don’t like what they are telling you. You probably won’t win.

The article Apple: When Making a Snowman originally appeared on Fool.com and is written by Nathaniel Munson.

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