Apple computer has been the iconic technology growth stock for the past generation. The company has been able to produce products and services that have been eagerly consumed by a worldwide audience. Very few companies have experienced the tremendous consistent growth in business and market cap as this company.
Over the years, my skepticism of their continued ability to execute has been pushed aside by the stock’s steamrolling advance. And yet, there are some signs now that momentum may be flagging. Looking at the long term chart below, the advance in stock price is obvious. If we look a bit closer, we can see some intriguing divergences in some technical indicators.
First, we note that the price is substantially above the standard 50 and 200 period moving averages, not a bearish sign in of itself, but when coupled with other momentum indicators, is a cautionary flag. The RSI indicator directly below the price chart shows a decline in peaks even as new highs have been made over the years. Again, not in of itself bearish, but merely a sign that not all is pulling in the same direction. Another indicator which I follow is the SCTR rating, a creation of the people at Stockcharts, which shows the amount of buying conviction on a given stock. We can see this same issue on the weekly charts:
We see again that the recent move to new highs has come with a noticeably lower conviction than in past moves to highs. We can’t predict that this will be the end of AAPL’s advance, there is far too much strength in the trend. But at this juncture, the risk reward looks compelling for a near term defensive position on the issue. I expect that a retracement to the 130 to 135 area can be reached on a pullback and that’s barely a 10% correction from present levels. Should this materialize, we’ll reassess to determine whether this is only a correction in a long bull trend or a significant turning point in AAPL.
I also point out that while AAPL is but one issue, it is one of the most important stocks in the market today by virtue of its leadership role in the portfolios of investment managers. Weakness in the stock price will precipitate even more selling as managers adjust their exposures. This may bleed over to other extended stocks.