APPLE: Will History Repeat Itself? (Inverted Teacup Pattern)

By Jaan Seunnasepp - September 27, 2012 | Tickers: AMZN, AAPL, DELL, GOOG, MSFT | 0 Comments

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Apple (NASDAQ: AAPL) has an interesting pattern on the chart right now. It makes me wonder: Will Apple history repeat itself.

Caveat! I need to say that I am not in any way a technical analysis specialist. I do look at TA from time to time, but I mostly use the tools provided by Fidelity Investments (where I have my account) to do the analysis, and just see what they have to say. As an engineer, I do find TA posts interesting. (See my earlier post) But again - I am not a specialist here.

That said, I have to say I have noticed this very interesting pattern. I call it the Inverted Teacup. (TA has a pattern called cup and handle, but this is different.)

• Chart 1 - Apple - Inverted Teacup Pattern, July 2012

Look at chart #1 and you will see what I am talking about. It begins towards the end of July and runs to about 9 August. As I have outlined in blue, there is an upside down handle followed by a larger cup. Essentially, there is a brief, sharp run up, followed by a five day retraction to precisely the same level (I will call it the LIP). This is followed by a steep rise over several days that then levels out. Before long, there is a quick fall that more or less mirrors the rise right back to the aforementioned LIP. This is the setup for the whole point of this exercise:

From this retreat to the LIP we have a sharp, significant and extended run up in the price - over $100.

The interesting thing here is:

• Right now we are in an almost identical pattern!

Look at chart #2. Here you will see an almost identical pattern (though a bit compressed) in orange. The handle begins on 4 Sept., drops to the LIP of 660 on the 11th, then yesterday, with a daily pattern similar to that of July 25th, it does a "return to the LIP." Now Thursday morning we had drop to $660.38 (the LIP) and a significant rise and it closed  at $681.41  up $16.23 - 2.44%. Boy, this is beginning to look familiar!

• Chart 2 - Apple - Inverted Teacup Pattern, July & Sept. 2012

What does it all mean?

I think this pattern strongly illustrates "buy the rumor, sell the news" pattern of behavior. The July pattern in blue began just before earnings release, and ended just after it. To my mind, there are a few factors at work here:

1. Buy-rumor/sell-news mentality. This is prevalent throughout investments.
2. Apple has so many naysayers, that any announcement that has any negative points, no matter how insignificant, get amplified to a not-so-dull roar. (Think antennagate and now Maps.) Many investors actually believe this anti-hype.
3. People following #1 and #2 ignore the real message of the announcement (5 million iPhone 5s sold in 3 days) and jump ship, leaving room for the "real investors" to jump in.

Is this the only time?

One would ask: Is this just a single example, or are there other instances of this pattern?

Looking back, I find that from 2009 on, there are many instances of this pattern. In fact, several big runs have begun with it.

Signs of change

If Apple closes below $660 or otherwise fails to break above the "cup bootom" of $705, then the pattern would be broken.

Homework assignment

Can you find this pattern in your favorite stocks? Let me know.

Fundamentals

Now the question is “Do fundamentals support this?”

When you compare Apple with other companies with which it competes, you see that it is relatively cheap. The PE is low or at least competitive and the PEG is the lowest by far. If you take into account that Apple has roughly $100/share in short and long term cash and convertibles, then the PE shrinks to 13.28 (yesterday’s close). Sure, the others will shrink somewhat also, but not by anywhere near as much. Apples's other ratios will shrink as well when you deduct for cash, leaving a very undervalued company.

Conclusion

IF (note the big "if") our current pattern leads to a repeat of what followed the blue one, then Apple is in for another run, and now would be the time to get on board.

Alternatively, as we come into yet another pre-earnings timeframe, perhaps we will see just one more teacup coming up.

Warning! If it fails to break past the bottom of the cup (around $705) then the pattern will not hold.

Will Apple run up another 100 points? I don't know. I went to read the tea leaves, but as you can see, the cup is upside down. They all fell out.

Good luck in your investing - and many happy returns!

=====

While I am sure that many will call this "creative fiction," a free sample of my real creative fiction (under pen-name Jaan S) can be found at the link below. A short-short story (560 words), it is just a 2 minute read. I would love your comments.

• 50 Cent Flash Fiction Sample Story: The Room

==== Understanding Apple series

You may love Apple and their products, or hate them to the core, but you cannot deny that Apple now has the highest market cap of any company, their products are trend setters, and currently they are trading at rather low multiples, especially regarding forward earnings.

Warren Buffet has the maxim: “Invest in what you know!” So, for those who want a unique perspective on Apple’s success, I have a series of articles Understanding Apple. I hope you will find them helpful and provocative.

Let me know what you think.

Previous article: iPhone 5 is a screamer!

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