SPX and Apple Updates: Is Apple Finally Ripe to Fall?

By now, most traders know that Apple had its tree shaken yesterday.  It missed earnings and disappointed analysts, largely due to iPhone sales coming in much lower than expected.  After hitting a new all-time closing high on Tuesday, the stock was hammered in after-hours trade, dropping just over $28 per share.  It's been exactly a month since I updated my chart and count for Apple, and with the earnings miss yesterday, now seems like a good time to bring everything current. 

I will also be updating the S&P 500 (SPX) in the latter portion of this article.

The last time I updated Apple's chart, it had closed at 411.63, and I suggested that it was getting very close to a significant top.  If Tuesday's close of 422.24 ends up being "the" top, I'll be pretty satisfied to have called it within 2.6%. 

The topping formation I am currently favoring for Apple is an expanding ending diagonal fifth wave.  Tuesday, we may have completed wave e, the final wave of that formation.  However, the potential exists for one more down-up move to a marginal new high to complete the pattern.  Either way, if this interpretation is correct, Tuesday's high should be within a couple percentage points of either an intermediate top (likely to last a couple years -- my preferred view), or a long-term top (potentially lasting much longer).  The charts seem to argue that the greater risk in Apple is now on the long side of the trade.

 On the chart above, my preferred count is shown in red, and argues that Apple just completed a massive third wave rally off the 2009 lows (or is currently completing the third wave -- it could form two more legs to the e-wave, as shown in gray).  I believe Apple's next move, starting now and running through 2012, is a trip to the lower trendchannel boundary in the 270's.  After a touch of the lower channel, Apple will again see a large rally, which should take it up into the $600's. 

However, the alternate count is more bearish.

The alternate count is shown in brown and suggests that Primary Wave 4 completed already, and we are now in Wave 5 (or just completed Wave 5), which would mean Apple is currently completing a long-term top.  I don't like this count as much, because Primary Wave 2 (red) took over a year to complete.  As shown in this alternate count, Primary Wave 4 completed in only a few months.  In Elliott terms, Primary Wave 2 was a straightforward "simple" zigzag correction.  This argues that Wave 4 should be a more complex correction, implying that it could potentially last longer than Wave 2.  It seems unlikely that it would instead be much shorter, as the alternate count shows. 

As a result, I would assign the alternate count roughly a 20% probability; assign roughly 70% to the preferred count; and the remaining 10% would be left for various other interpretations.

Regarding the S&P 500, there simply isn't much to add over what was discussed in yesterday's article.  If you're new to the discussion, it would be helpful to read yesterday's article, which focusses more on the intermediate and long-term.  Over the short term, there are numerous potential resolutions to the current structure, and the market has yet to reveal which one it has chosen.  I have updated the ending diagonal chart I suggested yesterday as one potential resolution.  The market behaved in accordance with the projection as shown in yesterday's chart, although it reached the target a bit faster than anticipated:

 I continue to believe that the market is not going significantly higher until it experiences more of a correction.  If this ending diagonal is the correct interpretation, we should finally breakdown beneath the 1190 support zone.  However, caution is warranted, as discussed below.

The first new possibility that Tuesday's action has opened up is the potential that the sideways correction the market just experienced was actually the 4th wave.  I view this as a very reasonable possibility, and sustained trade above Tuesday's high would shift my preference to this count.  The chart below shows how it might play out:

A second potential I want to call your attention to would be another formation unfavorable to bears, at least over the short-term.  It is possible that the market is already in the B-wave.  As I stated in a prior article:

B-waves are tricky and somewhat unpredictable.   B-waves can actually retrace up to 138.2% of the prior move, and still be within acceptable guidelines.  They often form triangles or other difficult-to-predict patterns.  B-waves are the Claus von Bulows of the Elliott world. 

Another thing a B-wave can do is actually exceed the top of the A-wave; in those cases, the market moves sideways-to-higher while it's correcting.  For example, if this is a B-wave triangle, the market may trade sideways above 1190 +/- throughout the entire correction, then end with a fake-out beneath 1190 which whipsaws (much like we saw at the recent 1074 bottom), and from there launch directly into the C-wave.

There is some logic to this possibility:  I don't feel this rally has been driven by bulls so much as it's been driven by short-covering.  I base this opinion on the fact that there simply isn't much liquidity present in the system; and bulls need liquidity to sustain rallies.  Trapping the bears above 1190 would provide another burst of fuel for the rally if/when the market finally breaks out and triggers the many stop-loss buy orders which are surely lurking somewhere above the recent highs.

The short-term support level which has formed around 1190 is therefore becoming critical for the bears.  In the upcoming sessions, pay close attention to the way the market behaves around this level; sustained trade below 1190 would rule out the B-wave triangle and lend credence to the ending diagonal shown in the chart above.  Conversely, another solid bounce off that level would increase the odds that a triangle is forming.

So, over the short-term anyway, the market is still in the "no crystal ball" zone.  Trade safe!

The original article, and many more, can be found at http://pretzelcharts.blogspot.com/