Topping patterns and a Fruit Company

My observations below should be viewed as general advice and may not be right for you

It is almost impossible to ignore the importance of everyone’s favourite company, Apple, when analysing the market. This company is now some 20% of the Nasdaq and also a huge chunk of the S&P500.

  

Recently I have received a lot of comments from clients in regards topping patterns in Apple as well as the global indices such as the S&P500 and the Eurostoxx. These are very valid points raised indeed and I can’t refute what looks to be like clear Head and Shoulders patterns.

However, I have also often said in the past that some of my favourite trading setups are “failed” patterns.  What this really means is that when a market fails to follow through in the direction of a chart signal, it very strongly suggests the possibility of a significant move in the opposite direction! The crowd is positioned in anticipation of the trading pattern and when this fails to play out, they are forced to unwind on mass leading to a sharp move. It could be argued that this happens more frequently, in a perverse way, as Technical analysis has gained increasing popularity thus more traders are piling into the same positions.

I wrote about this in a previous blog post here: http://fpmarkets.blogspot.com.au/2012/08/the-most-important-rule-in-chart.html.

Apple has triggered a valid Head and Shoulder pattern but will we see follow through? I thought this move would serve as an interesting example and experiment. Here is the chart:

Apple Daily:

Confirmed breakdown through the head and shoulder neckline. 

Note that the neckline is at the 650/655 level and thus I believe a number of traders would have used a close below here as a trigger. Thus where do you think their stop losses are likely to be? My bet is around 655/660.

Thus what I am suggesting is that any move back above 655 would be a powerful signal that the stock has bottomed and a powerful short covering rally may ensue. Short term traders could look to short the 650 level on this first retest and if it fails to sell off, quickly cover and go long if the stocks breaks back above 655. That’s just how I view things.

Here is the potential bullish setup I am looking at:

Apple Daily 2:

Price has sold off into the upward trendline and a strong support zone at 630/640. There was a bullish reversal candle out of here which implies a selling capitulation with buyers coming out on top. This could be the first sign of more follow through to the upside.

APPLE 60mins:
Nice bounce out of the low end of this channel. A retest of the recent lows could offer an interesting long entry. The key resistance level and breakout level is 650/55 as shown. 

So what does this mean for the broader market given Apples weighting? Well if Apple doesnt breakdown, then I doubt the market will. 

Here are the other charts of concern but ask yourself what would happen if they failed to play out? What would be the pain level for shorts if there was no follow through? I am not suggesting this will happen but just anticipating.

Eurostoxx Daily:

Double top and Head and Shoulders

S&P500 Daily:

A topping pattern forming?

Interesting times no doubt. For me, I think this is a potential buying area into a confluence of support. If it fails to hold then so be it. I would prefer to buy dips into the uptrend into key support areas than fight it for now. 

S&P500 Daily:

This is my support zone and buy zone coming into tonight 

Thanks

Austin