The Potential Market Impact of a Topping Apple (AAPL)

On our sister blog yesterday we pointed out that AAPL has violated a key sell rule for an uptrending stock: price action has gotten overheated to the point that it is breaking above an upper channel line on a log chart. To be valid the upper channel line has to extend back at least four to six months. AAPL’s dates back to May.

History teaches this is a warning sign that the stock’s run is about finished. But it doesn’t have to be immediate. It’s an early warning system, if you will, and puts holders on notice that they should be scrutinizing the stock’s trading action with extra care.

Today AAPL has bulled ahead to all time highs on huge volume. Since it filed its earnings report it has gained, as we go to publication, nearly 9% in less than a session and a half; the gain is better than 11% off its recent lows. For a big cap like AAPL that’s pretty heady stuff.

The gap up, the volume explosion, the upper channel line violation. When taken separately there is nothing extraordinary about any of them. But when taken together they speak to the possibility of AAPL topping in a price climax.

A true price climax will see price advance at least 25% in a week or two. And volume should remain heavy. We are thus a long way from seeing this type of price action but with AAPL clearly the table is set.

Which leads us to the main focus of our musing: AAPL is the institutional leader of the current bull market. It is widely owned and universally loved and has been rewarded with excellent price appreciation off the market’s March lows. Should AAPL top, will this be a “tell” for this leg of the bull market?

History suggests unless it is accompanied by other price climaxes it doesn’t have to be. In late December 1999 and early January 2000 Qualcomm (QCOM) was THE market’s darling stock in what was a sea of wonder stocks. The stock climaxed in an orgy of buying that saw price appreciate almost 60% in four sessions. During the frenzy one analyst, who probably never lived it down, prognosticated a $1000 target for what was an $800 stock at its peak.

The NASDAQ's uptrend took a quick 8% hit but lived on for another two months during which time a lot more money was printed on the long side. When it finally peaked there were a plethora of climaxing stocks, the most blatant signal the bull market was at an end.

So keep an eye on AAPL. Understand that if it climaxes it might have a significant effect on the market over the short term, sufficient that you will have to closely monitor your positions. But unless it is accompanied by similar action in other leading stocks the market is apt to absorb the punch and move forward.