Apple Back in a Wedge

NEW YORK ( TheStreet) -- I was watching a YouTube video earlier, where Oscar Carboni, the creator of Live With Oscar, the purveyor of technical analysis, the man who declares fundamentals appears first in charts, the man whose prolific videos and brash personality have won him a regular guest seat on Fox with Neil Cavuto, the pit-floor-suited man who made famous the trader's mantra, "Stops are in, emotions are out," that he should be "committed to the psycho ward," because his proprietary OMNI Indicator was wrong again, undoubtedly wiping out millions of dollars from his legion of followers' trading accounts.

Oscar should be given props. He's a great ambassador for the art of technical analysis, as he assumes responsibility for his bad calls, and he professes good trading habits, like setting stops before executing a trade. I have no problem with the message of discipline he portrays, and the obligatory warning he gives that trading is risky and you could lose everything.

What I do have a problem with is his evangelistic preaching of technical analysis dogma, that it is the best way to put your money at risk in the futures and stock markets. I have a problem because he mesmerizes naive traders, just like those bible-belt preachers, into believing his 31 years as a trader-analyst will rub off on you, especially if you follow him to Las Vegas and take his $6,000 course.

And while Oscar's application of technical analysis is "technically" accurate and sound, and his rules and Oscarisms like, "Double Tops Bring Market Drops," are effective teaching techniques, I am concerned his videos never mention risk and money management. I'm concerned that hundreds, maybe thousands of people will be led by this YouTube Pied Piper to fiscal disaster.

So, what does this have to do with Apple ( AAPL) and descending wedges? Well, I'm about to inflict upon you my own version of technical analysis, something I have been doing for decades, just like Oscar, but with the following caveat.

The first word in this art, and it is an intuitive art, not a science; the first word is technical. "Technical" implies something scientific, something that has endured the rigor of scientific methods and principles. But the fact is, technical analysis is not a science, it is more of an artful guess. To the extent that there is some correlation to drawing lines and mapping mob behavior, it has some practical use for visualizing patterns that may or may not repeat. But when put to the scrutiny of statistical analysis, the rules of technical analysis turn out to be not much better than a coin flip at determining the future direction of price.

With that out of the way, we can talk about Apple wedges. But wait. You're probably thinking that since I'm so down on technical analysis, then I must favor fundamental analysis, right? Wrong! I'll have loads to say in future posts about the charlatans (a.k.a. analysts) that work for evil brokers. Fundamentalists are no better or worse than Oscar Carboni, or John Murphy, or Jesse Livermore, who have made and lost fortunes several times over.

With that off my chest, let's get to Apple and it's falling price, and where I think it's going. First I want to dispel the myth that Apple's stock is a reflection of a sinking company. It's not. Apple is strong, one of the best, if not the best managed company on the planet.

It's just that the Apple faithful, the Loonians enraptured by the Steve Jobs philosophy ( I, among them), people permanently caught in his reality distortion field, think there's some kind of big money conspiracy, a massive manipulation that controls price, that evil corporate mongers are intent on knocking down the best representative of what a corporate giant could be.

So, why is Apple stock down, and where is it going, and what's all this about head and shoulders, Elliott waves, and descending wedges?

Apple's stock price is down, because the overall market perceives the current price to be a fair value for the company given the plethora of news, or lack there of, the perceived performance, the conglomeration of observations made by analysts with a stage, and the press that love to speculate on the fate of such a fateful company. The price is the truth, as it is perceived today. Tomorrow's price will be the truth as it will be perceived tomorrow.

The descending wedge I referred to in the title of this article, is a well known pattern in technical analysis, that means price is slowly converging to a point, where the market can agree represents a fair value for the stock. Well, Apple stock price recently tried to exit that wedge, but it fell right back in, indicating a false bottom or break away from the wedge. So, price the mob isn't yet satisfied with the current price. Price is the truth, you can deny it all you want, but the market is comprised of millions of people and corporations, who collectively think with a single mind.

I have used several TA techniques to help people visualize a potential target price, based on well known and accepted TA patterns. There's the head and shoulder pattern, which shows a target of 355. That's seems unfathomable when you consider the value of each share juxtaposed to Apple's cash on hand, which comes out to about $150 per share. Man, if you used a simple three times multiplier, then on a cash basis alone, the stock should be priced at $450. I just pulled that out of my hat by the way, just like an analyst, but it sounds reasonable, right?

If I were to use Elliott wave principles, then Apple stock price over the past seven years has been in a Super Cycle, where the the high price of 705, set in September of last year (2012), was the completion of Wave One, and the current downturn is Wave Two. According to Elliott wave Principles, the Wave Two will be made up of three waves down, referred to as A-B-C. And the rules are that Wave A will Equal Wave C. If that is true, then the target price for the bottom is 390, at which point the Wave Three of the Super Cycle will commence. And if that's true, then Apple is in for an incredible run to the Wave Three potential, which is measured by multiplying the Fibonacci Golden ration of 1.618 times the percentage of the advance, which works out to 1404! Whoa! And could go as high as 1600! But that will take 2 to 3 years.

Well, the point of this post was to put in perspective the efficacy of technical analysis, and to tell you there are many ways to analyze where Apple's stock price is going and where the bottom is likely to be, at least based on some artful techniques and pseudo science. We all need something to grasp hold of. Just sitting here and watching the company we love get torn to shreds in the media, and the stock price just keeps falling, it's hard, really hard. It's the not knowing that's the hardest. So, at least with a little SWAG (Scientific Wild-Ass Guess), you might be able to feel a little better knowing that there is a way to explain Apple's price, and there is a bottom, and it seems to be really close.

-- Written by Ernie Varitimos, author of the Apple Investor blog.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.
Ernie Varitimos has a long history with Apple as an investor, trader and consumer of its technology. He started his career as a rocket scientist and has spent the past 25 years driving, controlling and influencing technology in the financial industry. Ernie is a former hedge fund manager and current futures trader.