[The previous study of last April can be found here]
Since the first trading session following New Year's Eve, AAPL, a corporation that is larger than the economy of Switzerland, has just continued its downslide which started in Sept. and has fallen a further 21% in the past two months alone. In total, AAPL has declined 38.4% off its high that was registered on Sept. 21. That my friends is a crash of mega proportions by any standard. But when a meltdown like that occurs in the single largest corporation not only in the NAS 100 group, but in the entire solar system, one has to really sit up and truly try to understand the sheer enormity of an event like that. Imagine if the headlines read "Economy of Switzerland Declines 38.4% In Second Half". [The decline in AAPL is nearing its 6 month anniversary.]
|Click here for a live and updating version|
So now we're faced with a real dilemma. First of all, let's try to ascertain why the ratio has totally broken down as an indicator. When did the breakdown occur? Well, as clearly evident on the chart above, on the first trading day of this calendar year something happened that completely shattered the myth that "leaders lead". How in hell is this possible? What happened on that day? Well for one thing, that was the first trading day that followed the eve of the Congressional Comedy Show, the night when the world held it's collective breath as a human form of "leaders who don't lead" did little other than to bathe in the global limelight and the sheer glory of their own presence... and then did nothing. For those of you who have already forgotten what a silly and unnecessary piece of low quality drama that was, here's how the Guardian recorded it.
What followed on the next trading day was a rocket shot in equities markets heard around the world. Does anybody know why that happened by the way? To me it would have made more sense if global markets had tanked when the non-leaders of the largest economy in the world made the deliberate decision to bankrupt the nation. And here we are now, just two short months later and that decision has effectively been reversed. Spending will be cut. Not enough, but it's a start. So the most obvious question then should be "Is the fact that "the deflationary budget cuts are going into effect" going to fix what is wrong with the AAPL:$NDX ratio?" After all, sequestration is the direct opposite of the event that was used as the excuse to launch the markets on Jan. 2. I don't know the answer to that question, but the logical conclusion would seem to be "yes, the correlation between AAPL and the NDX should once again become direct and nearly instantaneous as it had always been prior to the contrived equities launch of Jan. 2." That's not to say it will necessarily happen though since the global banking cabal seems to have patented the rights to logic and banned its use until further notice. A page right out of Monsanto's handbook. Nonetheless, we do our best to work through the smoke and mirrors.
A Short Exercise To Examine the Enormity Of This Aberration
So why did the ratio break down? What would be required for it to break down? In order to try to get a grasp on what effect AAPL's recent performance has had on the $NDX, I turned to a little calculator I devised on Excel a couple of years ago that can provide those answers reasonably accurately. I say "reasonably" because we're never certain what weighting to give AAPL as a percentage of the entire NASDAQ 100. The last figure I read said that AAPL comprised 19.8% of the entire $NDX, and of course as the value of AAPL drops, so does its weighting. So for the sake of this discussion I used 16% since AAPL has declined considerably in recent months.
The results show that had AAPL behaved just since the first trading day of this year exactly the same as the other 99 companies in the $NDX had done, the $NDX would have closed on Friday at approximately 2855 instead of 2747.75. Let's round that off to 107 points difference.
...continue toward getting some answers.
So what's next? Is the decline in AAPL complete or near completion? I do not believe it is. If not, what does that mean for the overall $NDX going forward? And perhaps most importantly, what would be the result when AAPL does find a bottom and comes roaring back with a vengeance... even if it were only a snapback corrective rally in a larger cyclical or even secular downtrend for AAPL? The recent record suggests that if AAPL finds a bottom before the $NDX decides to play catch-up, the rally that would be ignited in the NAS would likely be spectacular. Would it rise as much as AAPL will? Absolutely not! Would it rise at least to a certain degree along with AAPL? Definitely! Will those events finally turn the AAPL:$NDX ratio higher thereby granting the green light for new highs? Yes, the ratio would obviously turn higher but it would almost assuredly just be a bounce. For our immediate trading needs though, we don't have to have the answer to that last question just yet. But sure as the sun will rise tomorrow, at some point we will! So we'll be keeping our eyes open for these signals because sure as shootin' they're coming, although it seems they're perhaps three or four weeks away.
Let's dismantle the ratio for a moment and take a look at each factor separately. First AAPL. A quick glance at the weekly chart below shows just how serious this decline in AAPL really is, especially in light of the fact that the major trend line dating back to the 2009 lows has been emphatically breached. This of course is not to imply that an impressive bounce won't happen, I'm sure it will. But that bounce does not appear to be on the immediate horizon:
|AAPL Weekly - Click here for a live and updating version which includes several indicators and a few annotations|
Next we zoom in on a daily chart for AAPL to see if we can garner any clues about the potential for a near term bottom:
|AAPL Daily - Click here for a live and updating version which includes several indicators and a few annotations|
I think there are two keys to the daily chart of AAPL. Firstly, the pattern that has emerged since day one of this year has evolved as a series of 3-wave sequences (white). Those are the hallmarks of a diagonal. Usually there is overlap between wave 1 and wave 4 in a diagonal but the AAPL case is a bit of an anomaly I think, because although all the white waves are 3s (including the two down-legs), there is no overlap. Nonetheless it is an impulse that certainly seems to need a 5th leg lower. Again, as seen on the weekly chart for AAPL, the daily also shows the area of 355 as being a reasonable target. A second and important key to the AAPL's daily chart is that none of the indicators are supporting the idea of higher prices at this point. So let's go with a price target for AAPL of $355 before we're likely to see any reasonable bottom.
And finally we'll investigate what the future might hold for the $NDX itself. Without even bothering you with a weekly chart, I'll just summarize the situation with a comment that all you bright readers are already aware of... the $NDX along with all the other majors are way overbought on a weekly bases complete with negative divergences on all fronts and they are due for a pullback. As well, the sharp leg down off the September top in the $NDX was an impulse while the current up-leg, at least at this stage, seems to be a clear corrective. In a normal world there would be little argument (not even from the most staunch bulls) that another down leg is now most likely. We should be seeing either a 'C' leg lower or a wave 3 at any time now.
So we dial in on the daily chart of the $NDX and cover the exact same time span that we investigated for AAPL a little earlier:
|$NDX Daily - Click here for a live and updating version which includes several indicators and a few annotations|
In his highly referenced library of chart patterns, Thomas Bulkowski describes the "Reverse Symmetrical Triangle" here. One of the requirements for a proper triangle of this nature is that it be made up of 5 legs, each one of them itself being a 3-wave sequence. On the chart of $NDX it is difficult to discern those five 3-wavers. But if you recall from the daily APPL chart, in that exact same time space APPL does indeed display what looks to be four of the five required 3-wavers. This fact makes it even easier to accept that what we are looking at in the $NDX is indeed a legitimate bearish broadening triangle.
To sum it up then, I think the huge disparity between AAPL and the $NDX, as revealed by the ratio between the two, is about to be resolved. I'll stick my neck out here and call for a rather harsh pullback over the next 3 or 4 weeks in all the major indices, with AAPL continuing to fall considerably harder than the $NDX does during that period. And the ratio continues to drop. I do so because I still believe in technical analysis, especially when it offers clues about overall market psychology on a scale as broad as this. And right or wrong, I simply interpret the market action since Jan. 2 as having been corrective and illusory. I believe that will be proven correct as the ratio has revealed a rare market extreme that simply cannot persist.
Wishing readers all the best... and stay safe!