Posted on August 26, 2008 - by andrew

Apple forming a new base

Apple (AAPL) was a market leader for much of 2007 and fell into a correction along with the rest of the market this year. However, Apple has been forming a new base over the last few months and is just -10% below its new buy point.

Apple was a favorite of mine during 2007 as I was able to bag profits of 30-40% on two separate occasions (see trading journal). I liked how Apple was a big cap growth stock that had a high number of shares traded daily. This made it easier to buy Apple as it broke past its buy points on heavier volume. Small cap growth stocks that are more thinly traded tend to gap up which makes it harder to buy closer to the buy point. When this happens, you end up paying too much and run the risk of getting shaken out if the stock reverses later on.

Apple has had strong fundamentals for the past few years because of its successful product lines (i.e. Mac, iPod, iPhone ). If a growth stock has a strong chart and a great growth story like Apple’s, I tend to be more confident and less likely to sell during minor corrections.

Apple is currently the 2nd ranked stock in the Computer-Manufacturers group, which is ranked #21 in Investors Business Daily’s Industry Group Rankings. This group has shown good momentum in recent weeks as it was ranked #33 last week and #94 six weeks ago. When groups move up the rankings like this, its usually a bullish sign that shows sector rotation in the market. I try to look for stocks from these groups during the beginning of a new market rally.

Here is a weekly chart of Apple (courtesy of StockCharts.com):

Apple peaked at $202.96 (Point 1) in late December and began to correct into a deep base. The base bottomed out around $115.44, which equates to a  -43% correction. In How To Make Money In Stocks, IBD’s founder William O’neil recommends avoiding stocks that correct more than -34%. However, growth stocks are an exception to the rule as it is common for some leaders to correct as much as 2.5 times the major market indexes. Given the fact that the NASDAQ corrected roughly -21% this year, Apple’s status as a market leader and its reasonable -43% decline is reasonable.

Apple’s correction eventually shaped into a cup base (Point 2) over the next five months.  It started to form a handle (Point 3) with a buy point of about $192.34, or 10 cents above the handle’s high.

After a few weeks of consolidating, the handle started to look more like another base (Point 4) within the larger consolidation that started in December. This new base has been forming for the last three months. The buy point for this new base would be the same as the old handle’s buy point, or $192.34.

Apple’s current base has had a couple of weeks of distribution on heavier volume compared to zero weeks of gains on heavier volume. This is generally not a good sign as you would like to see gains on heavier volume as the base forms its right side. However, there’s still time for Apple to make gains as it sits about 10% below its buy point. The market’s rally has also stalled a bit, which is reason to be cautious for now and wait for bullish action by the major indexes.

I think Apple is still a good candidate for your buy lists. Investors should wait for two things to happen before buying shares in Apple:

1. The major indexes to show resilience and bullish action.
2. A break out past the $192.34 buy point on heavier volume (i.e. +50% above its daily average volume).

**UPDATE**: Here’s a follow-up on Apple’s chart