Everyone loves to talk about Apple (AAPL) and this stock happens to be at the center of this post. I’m not focusing on AAPL because it’s a popular stock, but rather because it is at a critical juncture (and arguably has been for some time now) as it is potentially forming what is known as a head & shoulders bottom. This is considered a very strong reversal pattern, and we can see it on AAPL’s daily chart.
The head & shoulders bottoming pattern is a pattern that many will talk about—probably because it is perhaps one of the most recognized patterns out there. Take a glance at the daily chart of APPL that I have presented below. The lines that I have drawn on the chart clearly show where the left shoulder, right shoulder, head, and neckline have been established. AAPL hit a new all-time high in September of last year, when it traded at ~$705 per share. It also traded at a new 52-week low when it hit the ~$385 mark. This $385 level coincides with the bottom of the “head” in this pattern. This is absolutely a pattern that many traders have their eyes on.
Right now, it looks as if the right shoulder is forming—and if we want confirmation from this bottoming pattern, we will need to see a surge to the upside. Volume is always a key element to these types of patterns, and we can see the huge pickup in volume right as AAPL bottomed and continued its ascent to the right shoulder. If this truly is the bottom for AAPL, then we need to see a break of the neckline, and an even stronger move higher. A general rule with these patterns, when measuring the “expected” move, is to measure the distance from the head to the neckline. Based on some so-so drawing techniques (on my end) let’s say that I have the head right around ~$400 and the neckline around ~$460. This is a distance of approximately 60 points (we’ll keep the math simple). If AAPL does indeed break above this neckline, and makes another charge higher, somewhere around $520 is a logical (and entirely possible) price target (remember: these are rough estimates).
A few final points on this particular chart (and many H&S patterns on charts in general): First of all, nearly everyone out there seems to be watching this particular pattern. AAPL is already one of the most popular stocks in the market, and this pattern is “clear as day” on one of the most looked upon timeframes to begin with (daily timeframe). What I have learned (and I learned this rather quickly) that with the market, when everyone is looking at the same thing, or expecting one thing to happen, it generally won’t pan out that way. We could even see a “nasty” reversal to the downside, and AAPL could make an even lower close than $385. That being said, sometimes these things do play out as expected. If you happen to be on the winning end of this trade, just make sure that your timing was optimal. Personally, I’m not ready to say that the bottom in AAPL was put in at ~$385. This pattern just seems “too obvious” to me. That being said, I could also be completely wrong—this is what’s so much fun about this game. Good luck trading out there.