Last night, we covered Apple's (AAPL) technicals on Mad Money. It was quite an honor to appear on the show! Today, I'd like to elaborate on that discussion, as there were several points that I neglected to mention. (Apple is part of TheStreet's Action Alerts PLUS portfolio.)
Technically, we can view Apple's technicals from two perspectives, or time frames. The weekly chart shows Apple from an investor's perspective, while the daily chart shows the stock from a swing trader's point of view. Both perspectives help form our final analysis.
First, we'll look at the daily chart, where bulls have held the upper hand for the past two years. However, the bears mounted a major counteroffensive last week.
Bears were able to push Apple down to $120, which acted as support (up arrow). That same area acted as resistance late last year (down arrow). The bounce from $120 is a classic example of how resistance, once broken, often becomes support. Despite the pullback, Apple's 200-day moving average (green) remains intact.
As Apple dipped to $120, the stock's relative strength index (RSI) indicator moved into oversold territory for the first time in over two years (red, circled). The oversold condition encouraged buyers to step in, as it signaled that Apple was inexpensive on a relative basis.
Meanwhile, Apple's weekly candlestick chart shows a wicked reversal after a six-week pullback. The long wick on the bottom of last week's candle (arrow) indicates that sellers were burned by the quick turnaround.
The psychological effect of that wick on sellers is similar to putting your hand on a hot stove; the longer the wick, the hotter the stove. The swift reversal acts as a deterrent to sellers; by removing some sellers from the equation, the candlestick indicates that the path of least resistance is higher. This would be confirmed if this week's candle can manage to close above last week's high of $126.23. Apple is trading slightly above that price as I write.
Apple remains above its 50-week (blue) and 200-week (red) moving averages, indicating that the stock is still in a healthy, long-term uptrend.
In summary, both from a trading and an investing perspective, Apple's outlook remains positive. Sellers who were emboldened by the stock's recent selloff have now been chastened and will likely shift their focus elsewhere. Meanwhile, Apple needs to stay above $120 and maintain its position above its 200-day moving average to keep its rally alive. Apple is scheduled to report earnings on Tuesday after the close.