Buy Apple? Not Yet

 | Oct 20, 2011 | 10:20 AM EDT
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This column originally appeared on Real Money Pro.

If you count emails, phone calls and texts, I must have gotten two dozen requests for my take on Apple (AAPL). Since everyone's asking for my opinion, I might as well give it: Apple looks like it has more downside. 

While I can't buy Apple at its current price, the question is should I buy it at all and if so, when? Apple is still above its major support levels, and that's what will tell the tale -- will institutional buyers step in at those points or will they step back?

As usual, I'll approach this stock from a technical perspective. For a great article about Apple from a more fundamental perspective, be sure to read "Eight Questions Before You Bite the Apple" by Doug Kass.

The stock has shown a tendency to bounce off its 50-day moving average (blue), and when that fails, it finds support on its 200-day moving average (red). If you're trying to pick up shares, the current levels show no real support; instead of buying now, I'd initiate a small position (one-third of normal size) at the 50-day moving average ($387 area) and add to it at the 200-day ($357 area) if it should reach those points.

Apple (AAPL) -- Daily
Source: TradeStation

With the exception of a brief interlude in June, Apple hasn't spent any appreciable amount of time beneath its 200-day moving average since early 2009, so that looks like a great entry point. I'd enter the other two-thirds of the position there, depending on how quickly the stock arrives at that level.

As always, pay close attention to volume and velocity. There's a big difference between a stock that floats down like a feather and one that screams down like a rocket re-entering the atmosphere. I wouldn't buy Apple at either moving average if its behavior mirrors the latter.

While Apple's long-term technical outlook was not severely damaged by this week's activity, those who stepped in Wednesday may have entered too soon. Two reasons for this are the shape of yesterday's candle (highlighted) and the high volume that accompanied it.

Whenever I look at the shape of a candle, I think about the emotions experienced by the participants in the trade. How did the bulls feel at the end of this day? How did the bears feel?

The bulls could not have been happy with yesterday's close, which was near the lows for the day. Apple traded in a $10.62 range during normal market hours, but closed only $0.82 above its low. This tells me that the vast majority that purchased yesterday are losing money. Meanwhile, the high volume tells me that there may be many traders in that boat.

Conversely, most who sold short yesterday are probably sitting on gains right now. If Apple can trade below yesterday's low of $397.80, this will be true of all those who shorted yesterday. It will also mean the stock has lost its psychological support level of $400.

A move beneath $397.80 could force short-term traders who bought yesterday to take a loss, thereby pushing the stock lower. Those who went long yesterday for a short-term trade will find it difficult to justify maintaining that position if Apple trades beneath yesterday's low. That selling could be the catalyst that opens the door to the 50-day moving average, where I'll be waiting and observing with two key elements: dry powder and healthy skepticism.

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