Apple Stock May Be Headed For A Near Term Correction - Technical Analysis

AAPL stock seems to have entered overbought territory. A correction could be on the cards.

Apple stock could be headed for a correction

Shares of Cupertino, California-based Apple Inc (NASDAQ:AAPL) have been making new highs lately. On the 15th of March, AAPL stock closed the day above the $140 mark for the first time post its 2014 stock split, recording its all-time closing high of $140.46 a share. Apple shares are now up by close to 10% in March alone, and as it appears, the stock seems to have entered overbought territory. In fact, multiple technical indicators currently suggest that a correction could be on the cards.

AAPL stock has entered overbought territory.

Shares of Apple have registered handy gains this year, rising by over 21% in the Year-To-Date (YTD). That compares with a 9.6% surge in the NASDAQ, which is impressive in itself considering that we are still only mid-way through March. Of Apple's handsome rally in 2017 so far, close to 10% of the gains have come in the last 15 days. This strong momentum has, however, pushed AAPL stock into overbought territory. Three separate technical indicators, the Bollinger Bands, the Relative Strength Index (RSI) and the MACD, suggest that a correction could be on the cards.

For starters, let's look at the RSI. For those unfamiliar, the RSI is used to detect overbought and oversold situations. When the RSI is below 30, a stock is deemed to have entered oversold territory, with 70 serving as the threshold for overbought stocks. While individual technical analysts sometimes use different thresholds, 30 and 70 are most commonly used. Following yesterday's uptick of just over 1%, the RSI for Apple has jumped from 62.24 to 72.93, indicating that the stock is currently overbought.

Bollinger Bands are plotted two standard deviations away (above and below) from the 21-day simple moving average, which are meant to signal an overbought or oversold situation. When the price of a given stock moves closer to the upper band, it is considered to be overbought, while a move closing in on the lower band suggests that the stock has entered oversold territory. If you look at a chart that has the Bollinger Bands plotted, you'll notice how AAPL's stock price has moved within these lines on most occasions, falling after every rise above of the upper band. Apple's stock price is now touching the upper band, and a move higher might take it past the upper band, which could trigger a correction. And with the bands coming closer together, which is commonly known as a squeeze in this context, higher volatility could be expected. In this case, the volatility could be on the downside.

MACD or Moving Average Convergence Divergence, shows the relationship between two exponential moving averages of price. Exponential moving averages differ from simple moving averages in that they give greater importance to recent movements, as opposed to simple moving averages where each of the data points are assigned equal weight. MACD is calculated by subtracting the 26 days moving average from the 12 day moving average. A 9 day exponential moving average, called the 'signal line' is plotted alongside, to function as a trigger for buy and sell signals. When the MACD falls below the signal line, it's a bearish trigger, or a sell signal. In Apple's case, the MACD and signal lines have been somewhat close together, so this might not be a very conclusive signal, but if you look at a 3 month graph, the two are further apart, and it's much easier to see the crossovers. You can clearly see the MACD breaking away from the signal line and moving higher, in line with the spike in Apple's stock price at the beginning of Feb. And over the last few days, the MACD has fallen below the signal line, which is a bearish signal.

Skepticism is also inching higher ever so slightly among the shorts. According to the latest data based on short positions at the end of Feb, reported on March 9th, short interest is up by just over 7%, from 47.5 million shares to nearly 51 million shares. As a percentage of float, that's a small number for Apple, coming in at about 1%. What will really be interesting, is to see the next set of short interest figures, which should be out towards the end of the month, on the 24th, to be precise. To be clear, we're bullish on AAPL in the long term for multiple reasons, one of which is its fast growing services segment. There are other factors which we've covered in recent time, and you find all of that in our recent coverage of Apple. However, in the near term, the stock may be due for a correction, before it resumes its upward climb.

Apple is one of our top stock picks, which have beaten the NASDAQ by over 133%. If you're looking for picks, we also have picks from the auto sector, which have beaten the S&P 500 by over 165%.

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Vikram Nagarkar Vikram Nagarkar   on Amigobulls :

Neither Amigobulls, nor any members of its staff hold positions in any of the stocks discussed in this post. The author may not be a certified/registered investment advisor, and the opinions expressed should not be treated as investment advice. Buying and selling of securities carries the risk of monetary losses. Readers/Viewers are advised to carry out their own due diligence and consult their investment advisors before making any investment decisions. Neither Amigobulls, nor the author have any business relationship with any of the companies covered in this post.

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Comments on this article and AAPL stock

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How come Amazon and Alphabet are never ready for corrections? Why not Microsoft? It appears as though none of the FANG stocks ever need corrections. Amazon has been climbing for an entire year without a break. Why always Apple? Apple's P/E isn't that high and there's that huge reserve cash supply. What makes Apple stock so weak it always needs corrections.
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