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Elliott Waves Warn Of Apple Correction

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We all love Apple products. Investors love Apple shares.  In fact, so great is the affection for Apple that anyone who puts up a bearish call would incur the wrath of the ordinary investor. However, we should be wary of precisely these kinds of markets.  Do not get so carried away with a good thing that you become blinded to the possibility of an impending correction.

Back in April 2012, I had warned of a possible down move to $510. To many, it seemed improbable. To some, it even sounded absurd. Yet, the stock did correct to $520.  The up move since that low has taken Apple to new highs, but it is clear that the momentum has been slowing. Using Elliott Wave analysis as a tool, I came up with some interesting charts for your consideration. Let us start with the first chart below.

Starting from the low around $79 in January 2009, we could argue that Apple has just completed an extended third wave. According to Elliott Wave Theory, one of the three impulse waves in a five wave movement will likely be an abnormally long (or extended) wave.

Wave analysts often use Fibonacci ratios to compute possible end points for waves. An extended wave often travels 261.8% the distance covered by a preceding impulse wave. Perhaps Apple stock just completed an extended third wave? If this interpretation is correct, a fourth wave correction will travel by at least 23.6% of the third wave, giving us a target of $586.

The second chart gives a slightly different wave count, whereby the third wave was already finished at the $644 level and the dip to $520 referred in my previous post was actually the end of the fourth wave. This approach would mean that Apple has either already completed its fifth wave, or is not too far from doing so.

Either way, investors should become cautious during the next recovery because that is when smart money will get out of Apple. We surely don't want to be buying when these big players start taking profits. If this approach to counting the waves is taken,  the analyst will say that Apple stock will come down again to the $520 levels.

Our next chart zooms down to view the movement from the $520 low. Perhaps the recovery from $520 is only a three-wave movement, in which case any overlap of wave 'a' around $615 will confirm a move below $520. As of now, the long term trend seems strong enough that we don't need to be alarmed by this interpretation. However, it is not something we can entirely dismiss as inadmissible.

The final Elliott Wave chart is an intraday or 'hourly' chart. Looking at the down move from $705 to $659,  could it be possible that we are in a minor 5-wave sell off?  What we need to watch out now is a continuation of the sell off to around $638. If that happens, then we have to be really careful on any subsequent recovery. That recovery will probably be quite quick, but don't be lulled into thinking it will continue indefinitely.

We should actually be extra careful when it reaches around $676-680. If the price stalls there for some reason, and it starts coming down, don't hesitate to lighten up on your holdings of Apple.  A failure to hold on to strong gains after we reach $680 area will signal the possibility of a 14% correction.

A final few words to wrap up this commentary is in order. No one knows the future. But some techniques have worked well in the past, and we should take advantage of any insight that these techniques offer us. All I am trying to convey to you is that Elliott Waves are warning us that there exists a possibility of a sizeable correction, and while the stock could recover all the way to reach and perhaps overcome the recent high of $705, we should be prepared to exit at the first sign of reversal. When the correction begins, we should not hang on with the hope that it will come back.

There are hundreds of examples of Elliott Wave analysis in action in my Wavetimes blog and in my book, “Five Waves to Financial Freedom.”