Apple Breaks Below Support – More Pain to Come?

On Thursday, shares of Apple

dropped $10.06 (2.5%) to close at $385.22. The decline, which may seem insignificant to some, led the stock to break below a short-term support level dating back to October 10th. This development could be considered a minuscule victory for the bears, as the long-term uptrend remains intact, but indicates that shareholders may be in for a bumpy ride – at least in the near term. Volatility for Apple's stock has been elevated lately, and is showing no signs of abating anytime soon. The fact that the stock is moving towards crucial support levels is likely to only add fuel to the fire, as bulls and bears fight for supremacy.

After hitting an all time high of $426.7 (October 17th), the stock quickly retreated, dropping as much as 8.4% over the next four sessions – trading down to as low as $390.75. The stock quickly recovered, however, jumping back above $400 the very next day (October 24th). Despite the rebound, shares could not manage to hold above $409 in the subsequent sessions, although it was attempted on numerous occasions. Shares of Apple had been consolidating in between that range ($390.75 and $409.33) since October 19th. That band was broken in yesterday's session, as the stock sliced below previous its support at $390.75 with relative ease. As the six-month daily chart at the bottom of the article below shows (click to enlarge), the move is significant considering that the nearest support is the trendline (turquoise line) dating back to late June at $372. Should bears manage to break that level, it would mark a short-term trend reversal and surely add to the confidence of short sellers, putting the crucial $355 level at risk.

Despite the recent decline, Apple shares have been in an uptrend since 2009 when the stock hit a multi-year low at $78.20 (1/20/09). Currently this trendline (represented via the thick red line on the 6-month daily chart below) intersects just above $350 and could provide the necessary support to propel the stock back towards $400.

If investors are looking to get long, they may want to wait until Apple climbs back above $400, as such a move would likely force bears out of the trade in anticipation of a run to the all time high at $426.70. If you choose to get long on this recent pullback, keep a close eye on the support levels indicated above ($372 and around $355). Should those levels break, it is a key signal to get out, as the momentum (and trend) would then clearly favour the bears.

Volatility has declined from the peak on October 19th when the 14 day Average True Range [ATR] was at 13.89 - currently sitting at 8.67. This is still elevated compared to earlier in the year when the ATR was hovering around five. The 14-day RSI indicator has also been declining as of late, currently at 41.626. The reading indicates that there may still be some room to the downside, however, as the technical indicator has not yet entered “oversold” territory (reading below 30 is considered to be “oversold”). Traders should take note that every time the RSI has approached 30 (year to date), it has led to at least a short-term reversal to the upside.

Shares of Apple have been an investor's dream over the past few years, but the market has a knack for awaking investors with a violent smack. What direction the stock will end up going is impossible to know, but recognizing key support and resistance levels are vital to success in the market. One thing is for certain, the action for shares of Apple should be very interesting over the next few weeks.