Apple forms bullish pattern after iPhone 5 disappointment

On 12 September this year Apple revealed the details of its hotly anticipated iPhone 5, and, as it has done following previous big announcements, the company’s stock rose – at least for the first few days.

However after a rise of 7.5% the stock began to decline, falling from a high on 21 September of $705.07, to a low last Friday of $609.62. In the process of falling 13.5% Apple has begun to trace out a potentially bullish Falling Wedge pattern that could provide an excellent opportunity for traders.

The Falling Wedge pattern

As stockcharts.com explains, “the Falling Wedge pattern is a bullish chart pattern that begins wide at the top and contracts as prices move lower. This price action forms a cone that slopes down as the reaction highs and reaction lows converge. In contrast to symmetrical triangles, which have no definitive slope and no bias, falling wedges definitely slope down and have a bullish bias. However, this bullish bias cannot be realized until a resistance breakout.”

There are two types of falling wedge pattern, a reversal pattern which moves with the prevailing trend, and a continuation pattern which moves against the prevailing uptrend. In both cases the falling wedge still slopes down and both patterns are regarded as bullish.

As the chart below shows, in this instance the pattern is moving against Apple’s prevailing uptrend. It is therefore a continuation pattern.

The falling wedge pattern reveals a decrease in downside momentum and alerts technicians to a potential trend reversal.

A 6 month chart of Apple (AAPL) (Click on the chart for a larger version)

A 6 month chart of Apple (AAPL) (Click on the chart for a larger version)

Chart courtesy of stockcharts.com

The Chaikin Money Flow (CMF) indicator (circled) has recently moved into negative territory indicating an increase in selling pressure. The CMF indicator should begin to turn up in advance of a breakout, and a move into positive territory would help confirm a new bullish trend.

The price target for an upside breakout can be found by measuring the widest portion of the wedge and adding it to the breakout level. A breakout from the current price of $616.83 would take apple to around $665. Any breakout should be accompanied by an increase in volume which would help validate the move.

How to play a breakout in Apple

Those looking to play a breakout in Apple could go long on a break of the upper blue resistance line. However more cautious traders might want to wait for a post-breakout pullback which tests the resistance line and confirms it as a new area of support. A stop loss could then be placed just below this new support level to limit downside losses.

Apple news

Yesterday Apple released details of its new 7.9in iPad mini which weighs half as much, and has a smaller screen than the full-size iPad. However the announcement failed to impress the market and the stock closed 0.74% below the opening price of $621.44.

The new iPad mini range will start at £269 for the 16GB Wi-Fi model, and Apple is hoping the new device will build on the 100 million full-size iPads sold since 2010. The iPad mini is due to go on sale 2 November 2012.

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