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Apple - Double Bottom

Apple - Double Bottom

I've been watching the potential double bottom in Apple unfold for the last 5 weeks. Today it looks close enough to the break point to merit a blog post. With a lot of major market news due over the next few days, there's always a chance things could get moving fairly quickly from here.

There are several potential alternatives for buy set ups in this situation. Here are some thoughts.

Weekly Chart

I've used the weekly chart, to outline the potential double bottom  because it's a big pattern and this time frame gives a clear look at the big picture

Apple CFD Click to Enlarge Apple CFD
Click to Enlarge

Some of my thoughts on this pattern are:

  • While the 2 lows of the double bottom are not at exactly the same level, they're close enough to qualify. The 2nd is less than 1% higher than the first so this effectively represents rejection of the same support zone.
  • This is a deep pattern with a deep trend leading into it. The height of the double bottom represents about 20% of the value of the stock at its low point. Based on the measuring rule which assumes a relationship between the height of the pattern and the size of the  uptrend after a break, deep patterns have the largest profit potential. Patience can be needed to get the best out of them because large moves can take time to unfold
  • There are a few common approaches to entry strategy depending on how the situation unfolds from here
  • One would be to buy on a break above the dashed red resistance. The double bottom pattern is not completed until this occurs. A common strategy here would be to apply a price filter and wait for price to get well clear of the resistance before buying
  • A second possibility is that price initially respects the resistance and makes a "partial pullback" into the body of the pattern. In this case a technical trader might use strategies aimed at identifying when the partial pullback might be ending
  • A third possibility is another move right back to the double bottom support. In this case, many traders would look to buy if price bounces off that support
  • Fourthly, some traders use strategies aimed at buying on a re-test. They wait for price to break above the double bottom resistance and then buy if it pulls back to re-test the support at the old resistance line. Statistics gathered by Thomas Bulkowski in his "Encyclopaedia of Chart Patterns" suggest that this re-test strategy reduces the number of losses but means missing out on a lot of the most successful trends that explode out of the pattern and go on to complete a big uptrend without any re-test

Supporting Evidence

From a technical point of view, the slow stochastic in the box below the long term weekly chart supports the possibility of more upside to come. The stochastic is trending up and only in about mid- range

Another factor is that Apple's valuations don't look demanding. Apple is trading at 10.6 times F2014 earnings while Microsoft is at 10.4. Neither looks a stretch given current low interest rates.  The difference is that Apple seems to be correcting a bout of excessive pessimism in a process that could go further. Microsoft on the other hand looks to be winding back a bust of optimism.

Apple Forward PE Source: Bloomberg Click to Enlarge Apple Forward PE
Source: Bloomberg
Click to Enlarge

MSFT Forward PE Source: Bloomberg MSFT Forward PE
Source: Bloomberg

If there is a setup, I'll post a follow up with thoughts on strategies for stop loss management and profit targets

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