The technology giant reported earnings after Tuesday's close, and although the company beat estimates for revenue and earnings, shares sold off after the announcement. Investors likely were disappointed because Apple's earnings beat wasn't as big as they'd hoped. CNBC noted that it was the smallest earnings beat in percentage terms in two years.
But forget about whether the results were good enough or how many iPhones the company will sell in the current quarter. There is a more objective method for figuring out where the stock is headed in coming months.
Above is the monthly bar chart of Apple, going back to late 2006. Let's ask the Decision Support Engine question: "If I had no money in Apple currently, would a buy or sell action be justified, or no action at all?"
The first indicator to notice is the bearishly diverging lower highs in the stochastics vs. the higher highs in price. This sell signal last occurred in 2012. That led to a fall in prices to $53 from $95 -- a 44% slide -- in the ensuing eight months.
A similar slide from the recent test of $135 would imply a test of $73 in the coming six to 12 months, which is the zone of the 2014 low. Again, the sell signal is occurring while the stochastics are at the 90% overbought threshold. Scary? Yes.
This week's high tested the upper Bollinger Band ($132) but was well below the test of the upper two-standard-deviation band (currently $139) that halted the price surges of the past two years.
So, in this statistical gauge of price extremes, another bearish divergence is now in place. Combined, these two DSE components warn that the 200-day moving average (which is about $120 this week) is about to be tested. Closing under this level would bring the 2015 lows into view: the $105 zone. So, the support zone for the "initial" decline of significance can be targeted for $90, plus or minus $15. You won't find many pundits offering this path for the crowd's favorite stock, but history shows the potential is there.
Detailed technical analysis, and decades of industry experience, yield the imagined pattern Apple is likely to take in the next two years (shown by the blue lines on the right-hand side of the chart).
The big yellow box, capturing the zone between $53 and $86, highlights that after "initial" support creates the opportunity for a multimonth bounce (back toward $110, plus or minus $5), another selling window is expected into late 2016/early 2017, and it could target the lower $50s.
DSE strongly answers the decision support question with a resounding "sell actions" warning. Therefore, $120 should be used as a sell stops on any holdings that are not taken off the table in this $125-$128 zone. If you have flat or no Apple exposure, the DSE suggests you sell the stock short in this zone. If you've already sold Apple short, holding or adding to short exposure is suggested.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.