Apple's Best Days Are Past

Apple (AAPL Quote) scaled the lofty heights in 2007, turning the Cupertino computer and gadget maker into one of the hottest stocks in the tech universe and broad market. Its dramatic fall from grace in the last seven weeks has shocked loyal investors and forced a sober reexamination of the growth issues facing this widely held company.

It's no coincidence that the stock hit an all-time high on Dec. 27, or just three days prior to year-end. Legions of money managers held tightly onto outsized positions of this Wall Street favorite that buoyed their annual performance after a miserable year. The flip of the calendar gave them the perfect opportunity to take profits and move on to other investments.

The company has generated a near-cult status in recent years that's hard for outsiders to comprehend. To offer full disclosure, let me confess that I'm an Apple agnostic who doesn't really care about the company, one way or the other. I think that's a good place to be, because buying or selling this stock at the wrong time can be hazardous to your health.

In fact, Apple stock has fallen over 77 points since the December high. True believers look at this pullback as a small bump in the rally road, while company detractors believe that recent cracks in the growth story could escalate into a full-scale collapse we head through 2008.

As a technician and trader, I have little insight about iPod, iPhone or Mac sales going forward. But I can read the charts and see how they're shaping up after the recent plunge. Is now the right time to reload positions for a trip back to the highs? Or should current investors jump ship while they've still have the opportunity to salvage a few profits?

Apple (Monthly)

Click here for larger image.

Source: eSignal

Let's start with big picture and work our way forward. The monthly chart shows the stock hitting a notable high (pre-split) at $37.60 in March 2000 and then dropping into a long downtrend during the broad bear market. It bottomed out with the major indices in 2002 and began a slow recovery that accelerated two years later.

The impressive rally peaked at $86.40 in January 2006 and gave way to a six-month pullback that corresponded with that year's summer correction. Current history began at the July 2006 low, because that's the inception point for the parabolic rally that ended last December. The vertical burst posted an amazing 152-point gain in just over 18 months.

The deep selloff after the December high has retraced more than 38% of the entire rally since 2002, and more than 50% of the 2006 into 2007 uptrend. This decline looks absolutely massive on the monthly chart but the percentage loss is actually smaller than the selloff following the 2000 "bubble high".

What conclusion can we reach looking at the long-term Apple chart? Well, it isn't good news for the bulls. The rally off the 2006 low was parabolic in nature. As a rule, parabolas end poorly, as we've discovered with the housing market in the last two years. So it's likely the long uptrend has finally ended. In its place, I'm looking for lower prices, or a sideways period lasting for up to two years.

---

Apple (Weekly)

Click here for larger image.

Source: eSignal

The weekly chart illustrates the steep challenges facing this stock as we press toward the second quarter. Note the late January gap through $160. This breakdown violated four-month support at a topping pattern between $150 and $200. The space between $150 and $160 now marks strong resistance on any recovery attempt.

Note how the breakdown also corresponds with the 38% retracement of the 2006-07 rally. This down thrust sets up the likelihood of a continued decline into the 62% level at $108. That would correspond with a test of the August low, a pivot price that's turned into a major psychological level on many stocks and indices these days.

I suspect the price zone between $105 and $115 will mark the inception point for a recovery that lasts well into the second quarter. This level might even print the final lows for 2007. But as noted above, this stock won't be headed to new highs anytime soon. More likely we'll see a bounce into $155, followed by a long period of indecisive price action.

---

Apple (Daily)

Click here for larger image.

Source: eSignal

The daily pattern since the August low reinforces the sober observations noted on the longer-term charts. Look at the convergence between the 50- and 200-day moving averages, which have now turned into major resistance, and the $150-to-$155 zone noted as the likely termination point for any recovery attempt.

Now add in the broken July 2007 high, as well as gap downs from double-top support above $160. In sum, a defeated army of Apple shareholders is waiting patiently at these price levels to cut their losses and dump positions. This massive supply should inhibit upside progress for many months, even if the broad market stabilizes and moves higher.

Can long-term, deep-in-the-money Apple longs use this technical viewpoint to their advantage in the months ahead? Of course -- there are many things they can do to protect profits and reconsider their goals, given the broadly negative outlook for 2008.

First, they can lighten up after the stock bottoms out and retraces a good part of the recent downtrend. Second, they can buy long-term equity anticipation securities (LEAPS) or use shorter-term options to dampen volatility and lock in profits. Finally, and perhaps most important, they can just end their love affair and look for the next tech juggernaut, which is waiting patiently for their discovery.

Alan Farley provides daily stock picks and commentary with his 'Daily Swing Trade' newsletter.