AAPL bullish still

The Elliott wave count

For those of us who used trend channeling in the late 90's to count Elliott waves, AAPL was one of the greatest (certainly the greatest for me) disappointments. The reversal was premature, or so it seems, as the proposed wave 5 never materialized, and the stock collapsed from 60 to 28 in a day.

Since then, I took on the task of figuring out what went wrong as a means of uncovering the hoax behind the Elliott wave, if only for my education. Of course there was a lot more to Elliott wave counting than trend analysis. I have taught myself the Neely method, which is extremely time consuming and frustrating. Today, I can use it with much more confidence and ease.

Let's take the example of AAPL, since it has been in accelerated growth lately, very reminiscent of the counts of the late 90's, and may be warning us of an impending collapse. Can history repeat itself?

So far, the structure of the rally since early 2003 very much resembles the series of the late 90's. Today I have 2 alternative counts that for the moment point to continued rally, at least to test (and probably exceed) the year's high.

First, my preferred count, it is a double zigzag (abc-x-abc) for a total of 7 waves. If this count is correct, the last c wave (C2) is now in progress and should take AAPL to new highs. I have entered a possible Fibonacci retracements targets. As you can see, AAPL will have a strong resistance at the highs of January at around $45. If that is exceeded, my next targets are $50 and $52 1/2. The market should retrace from there. BUT Watch out! If this count is correct, we could have an abrupt when to the rally, just like it happened in 2000. For now, this is my preferred count.



An alternative count will make this an impulse series that is far from concluded. Under this scenario, I have the same intermediate-term targets, but the long-term would not be as bearish as the double zigzag scenario described first.
This alternative count is an impulse series (1-2-3-4-5) where the impulse wave 3 is in progress. Of course this wave 3 is itself formed by an impulse series which is currently on its 5th wave. This 5th wave should terminate above the peak of wave 3, unless it truncates. This are the important rules to follow about this series: 1. One of the 3 wave extends, so it is 162% of the next largest wave. 2. Wave 3 is never the shortest. So far the third wave labeled iii, is 279% of the wave labeled i. One should conclude that the proposed wave iii should be 162% of the proposed v wave to come, and thus we can estimate it to be 17.5 points. Assuming that the bottom of wave iv was reached in the lows of mid may, we should expect the rally to reach $50 or slightly above in the weeks to come. As I said before, under this scenario, AAPL would pull back or move sideways to form a longer term wave 4, and then eventually one more final rally.



Since in both cases, my counts are intermediate-term bullish, why not look at other indicators and see if they coincide with my Elliott counts?



AAPL is well above the 200 day moving average (or 50-week m.a.), and it has just recently moved above the 50 dma (10 week moving average), which has broken the down trend of the last 3 months.

The stochastic is also indicative of a reversal of trend, and a potential is there for a strong rally.

The ADX (directional movement), indicate that the stock has have a mostly sideways direction (low DX, grey line), but that it may also begin to gain momentum to the upside (green line)

The probabilities are on the side of AAPL, so I have entered a Call ratio calendar backspread, buying 10 Jan 06 37.5 calls and selling 5 October 37.5 calls. This is my favorite trade because it protects me against time decay and volatility spikes (at entry). So far, the trade looks good, but is should return me 100% if the stock rallies to the low 50's as I expect.

Note that the rally of mid April to mid may is consistent with a wave 1 and a wave 2 pullback thereafter. We should be entering a wave 3 is advanced of the earnings report. We will see...



Let's look at the charts with more detail. Assuming that AAPL completed an Elliott pattern at the February highs, how do I know that we are not already in a long-term impulse pattern down? How could we be sure that AAPL made a 4th (corrective wave) and are now ready to go UP to the 5th wave? Or the Alternative C2 UP to come?

The decline from the February highs, following the Neely method, should be characterized as a double flat with a missing X. This is a pattern that could be easily confused with an impulse pattern because the area where the X is missing can look like a wave-3 impulse. How do I rule out a long term impulse pattern down?

1. The supposed wave 2 is really a B1 wave because it retraces more than 61.8% of the supposed wave 1 (wave A1, really). A1 should be labeled corrective (:3) not impulsive (:5).

2. There is no alternation in time, price or structure between the supposed waves 2 and 4 ( these are B1 and B2, really and almost identical).

3. The Fibonacci relationships indicate that the supposed wave 3 does not extend, as it is less than 161.8% of the supposed wave 1 (these are waves C1-X-A1 not wave 3). The small difference between the supposed wave 1 and 3 could be justified only if the supposed wave 5 was to extend, becoming larger than 161.8% of the supposed wave 3, which of course it doesn't. Instead, the supposed wave 5 is short and equivalent in price to the other waves in the series, and more consistent with wave C2.



This corrective pattern is considered complete when the whole series is retraced by more than 61.8%, which it did in mid May. This complex pattern can be compacted to a corrective series and labeled (:3). There is all indication then the whole series is the wave 4 (or B2) of the larger multiyear pattern, is now complete and we should have a counter-trend pattern that should retrace back to the highs of February, or higher. This rally should materialize within the next few weeks.

I have tentatively labeled the more recent movements as impulsive, but they may as well develop as corrective. The hourly chart confirms that the recent rally to 41 is most likely a wave 1. However, wave 2 may still be in progress. While the decline to 36 is certainly the sufficient retracement for a wave 2, the most recent rally (from the 13th of June) looks to be corrective, implying that the wave 3 has not quite started. I'll keep track of the movement on AAPL, but I suspect that wave 3 will be well underway at or about the earnings report in mid July.