Apple, Inc (NASDAQ: AAPL) gapped up over 2% higher to start the trading day on Tuesday but almost immediately fell down to completely fill the gap.
The higher prices were likely in reaction to an inside bar pattern that the stock had developed on Friday and Monday, which leaned bullish because Apple was trading higher prior to creating the formation.
The stock still has a lot of work to do to negate a downtrend that Apple has been trading in since March 30, which may give bullish traders pause if considering entering into a long position for more than just a scalp or a swing.
A downtrend occurs when a stock consistently makes a series of lower lows and lower highs on the chart. The lower lows indicate the bears are in control while the intermittent lower highs indicate consolidation periods.
Traders can use moving averages to help identify a downtrend with descending lower timeframe moving averages (such as the eight-day or 21-day exponential moving averages) indicating the stock is in a steep shorter-term downtrend and descending longer-term moving averages (such as the 200-day simple moving average) indicating a long-term downtrend.
A stock often signals when the lower low is in by printing a reversal candlestick such as a doji, bullish engulfing or hammer candlestick. Likewise, the lower high could be signaled when a doji, gravestone or dragonfly candlestick is printed. Moreover, the lower lows and lower highs often take place at resistance and support levels.
In a downtrend the "trend is your friend" until it’s not and in a downtrend, there are ways for both bullish and bearish traders to participate in the stock:
- Bearish traders who are already holding a position in a stock can feel confident the downtrend will continue unless the stock makes a higher high. Traders looking to take a position in a stock trading in a downtrend can usually find the safest entry on the lower high.
- Bullish traders can enter the trade on the lower low and exit on the lower high. These traders can also enter when the downtrend breaks and the stock makes a higher high indicating a reversal into an uptrend may be in the cards.
The Apple Chart: Apple’s most recent lower high was printed on May 10 at $156.74 and the most recent lower low was printed at the $138.80 mark on May 12. Apple is unlikely to rise straight up to print a higher high, which means if the stock is going to reverse course into an uptrend, Apple will need to print a higher low.
- On Tuesday, Apple attempted to regain the eight-day exponential moving average (EMA) as support but rejected and wicked from the level. The inability to regain the area as support was caused by lower-than-average volume. At press time, only about 30 million Apple shares (NASDAQ:AAPL) had exchanged hands compared to the 10-day average of 121.64 million.
- If Apple closes the trading session under the eight-day EMA but above the $148 level, the stock will print a hanging man candlestick, which could indicate lower prices will come on Wednesday. Bullish traders who aren’t already in a position can watch for Apple to form a reversal candlestick above the most recent lower low for a possible entry.
- If the stock closes the trading session near its low-of-day price, Apple will print a bearish Marubozu candlestick, which could also indicate lower prices are in the cards. Bullish traders will want to see Apple eventually regain the eight-day EMA as support to have more confidence going forward.
- Apple has resistance above at $150 and $153.92 and support below at $146.41 and $143.51.
See Also: Apple Gets Its Bell Rung As Investor Fears Increase
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