Update Fri June 28: The scenario laid out in this post is now unlikely. The market did put in a short term bottom as expected according to item #4, but AAPL did not participate in the ensuing rally this week. So my #5 has been shown to be wrong. That calls into question the scenario in general. I am returning to having an open mind on AAPL. The rest of this post is left unchanged for reference purposes.
Current observations and guiding factors:
(I wanted to get this posted. I’ll pretty it up later and add links)
1) AAPL has an inverted H&S pattern since January earnings. The head is the price low at 485. There are two swing lows before that forming the left shoulder. There should be two price lows to the right side. We are now trying to form that second price low.
2) I measure AAPL valuation with my CPE levels. All the swing highs this year have been very near the same valuation at CPE 11.1. So that’s the ultimately critical valuation level to watch to confirm an eventual breakout to a higher valuation range later this year.
3) The swing low forming the second bottom of the right shoulder of the IHS pattern may occur at the same valuation level as the left shoulder bottoms. If this bottom were to occur at the same CPE level as the March low, it would be expected in the 390s.
4) My favorite market sentiment indicator to predict a general market bottom in an emotional selloff is to watch equity puts to open, and when that peaks. The market tends to bottom 3 days after that peak, +/- one day. Equity puts to open peaked last week Thursday. That means that as of now, I’m expecting a market bottom this week Monday, Tuesday, or Wednesday.
5) This AAPL decline is not from any AAPL specific news or event. It is along with the general market, so I’m expecting AAPL to bottom along with the market this time.
Put all that together and I am watching for AAPL to bottom somewhere in the 390s Monday, Tuesday, or Wednesday, and that will mark the nadir of AAPL valuation weakness and underperformance that started 9 months ago. Recovery from that nadir will be a process, start slowly, and build into later in 2013. The process will not accelerate until there is an AAPL specific catalyst, or an expectation of a time-specific catalyst.
To confirm, I will want to see AAPL outperformance, a big up day at some point, and AAPL price taking out some of the recent down trend lines, and ultimately exceeding the CPE 11.1 valuation resistance. Until that confirmation happens, this is just a roadmap expectation with enough likelihood that it gives me something to watch closely for.
With the recent bond market selloff and higher interest rates, equity fair valuations have been adjusted lower. Therefore taking out CPE 11.1 resistance will be more difficult.