Technical Training Series: Inside Day on AAPL

This story was updated at 10 a.m. EST to include a disclosure of the author's positions.

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

NEW YORK ( The FRED Report) -- This week's article is in response to several comments we saw about an article we wrote featuring Apple ( AAPL) ( As Apple Sours, Take a Bite of Small Cap) within the context of a specific technical pattern known as an "outside day negative reversal." At the time, several readers commented that AAPL had such strong fundamentals that "technicals did not apply."

Here at The FRED Report, we reject that assertion. Understand that we are not the sort of technician that says, "fundamentals don't matter." We believe that technical analysis measures some useful phenomena, and so when we see them we believe we are obligated to report, as eventually even a strong stock like AAPL will discount its fundamentals.

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Such a case occurred this week when AAPL had an "inside day." An inside day is a day where the high is lower, and the low higher than that of the previous day. An inside day is often a sign that a change in trend is coming almost immediately.

Perhaps the most dramatic example of this occurred in iShares Silver Trust ( SLV) in 2011 on April 29th. We show a chart below, and note that after that the inside day, SLV fell from 46.88 to 34.48 by May 6 -- a sizable decline in a short period of time, and it still remains below 46 as of this writing. We show the chart below.

Fast forward to the chart of AAPL on March 2 with a close of 545.18 and an inside day similar to SLV, above, and note that so far the stock fell to test 530 in a few days, and has rebounded somewhat. This is the sharpest dollar drop in AAPL in quite a while, as we show below -- and it may not be over.

We will know soon, whether AAPL exceeds the highs of the move, or whether it falls once again, but it is appropriate to warn readers, in the light of two other inside days that have occurred in AAPL in 2011. First, note the inside day on Sept. 21. The stock fell from 420 to 360 in short order. Also, observe the result of the inside day on Oct. 18, where the stock fell from around 422 to 363. Both of these were substantial drops, and can be observed on the chart above, and more clearly on the chart below.

These last were significant declines in the stock that evolved from a technical formation of a known type that connotes high risk. As such we at The FRED Report should warn subscribers when they occur.
At the time of publication, the author had no positions in any of the stocks discussed, although positions may change at any time.

Fred Meissner is founder and publisher of The Fred Report. Fred is a CMT and past President of the Market Technicians Association (MTA). He recently left Merrill Lynch's Market Analysis Department and Sector Strategy Department to form The Fred Report.�A detailed bio is here:Fred Meissner.

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