A Bad Apple Can Spoil the Whole Bunch

Evaldo Albuquerque (December 19, 2012)

Back in October, I mentioned there was one stock every investor should watch: Apple.

Because of the company’s huge market cap, AAPL has a big impact on market indices. It’s also the most widely owned stock by hedge funds.

For that reason, I mentioned it’s unlikely the market would rally without Apple. This has been the case so far. Since peaking in September, Apple is down 26%. The S&P 500 index did much better, dropping only 2%.

In other words, without Apple, the market can’t rally. It’s basically flat.

In that October commentary, I also mentioned that if AAPL dropped below its 200-day moving average, it would be a bad sign for the whole market. Well, things have only gotten worse since then.

It has not only violated that moving average, but the stock may be forming a very ugly pattern.

The weekly chart below shows that Apple is forming a POTENTIAL “head and shoulders” pattern, which indicates the end of the stock’s uptrend. I emphasized the word “potential” because AAPL needs to close below $500 to complete the pattern.

See larger image

If Apple closes below $500, a quick drop towards $400 isn’t at all unlikely. This would put tremendous pressure on the technology sector and the overall market.

So does that mean we’re doomed?

Not really. As I said, this could be a false alarm.

This bearish pattern is not complete yet. The stock has recently rebounded from the $500 level, and there are other technical signs that support a short-term rally.

If Apple moves above $575, which is the top of the “right shoulder,” it will be a good sign for the stock and the market. If it breaks below $500 in a decisive way, it will be a bad sign for the market.

So keep an eye on Apple. It can spoil the whole market if it breaks below $500.

Regards,

Evaldo Albuquerque
Editor, Pure Income

A Bad Apple Can Spoil the Whole Bunch

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