Don’t Get Caught in This Overcrowded Trade

After peaking on July 19, Apple (AAPL) reversed, leading the broader Nasdaq lower…

AAPL’s selloff was initially fueled by the Nasdaq rebalance and its disappointing Q3 earnings.

That sell continued last month with the Fed’s confirmation that rates were going to stay “higher for longer.”

Add in a bond market that’s been tanking daily, and it’s clear that the bears have had the upper hand lately.

Yet whatever the market narrative might be (in this case negative), the last thing traders want to do right now is get caught up in an overcrowded short trade…

And, with AAPL showing early signs of a potential rebound, today I want to see what’s in store for the market’s largest stock.

Warnings of Overheating

In the chart below, you can see that AAPL’s rally kicked off in January.

The rally was a strong reversal from the year-long downtrend last year that saw AAPL lose over 30%.

Apple (AAPL)

Source: eSignal

As the chart shows, AAPL’s rally coincided with two key bullish signals:

1. The relative strength index (RSI) rallied from oversold territory (lower gray dashed line). AAPL’s rally then continued with the RSI remaining in the upper half of its range.

2. The 10-day moving average (MA, red line) crossed above the 50-day MA (blue line) with both MAs steadily tracking higher.

Despite its strong momentum, it took until mid-June for AAPL to recoup all of last year’s losses. And take out its previous all-time high from January last year.

However, even before AAPL peaked on July 19, it was already showing signs of overheating…

Take another look:

Apple (AAPL)

Source: eSignal

Despite AAPL making higher highs (upper orange line), the RSI was showing declining momentum (lower orange line). This was a warning of a potential change in direction.

And that’s what we saw.

Coming off the back of its disappointing revenue numbers from Q3 earnings, you can see that gap lower after AAPL initially retraced.

AAPL tried to rally again in August. But when the RSI rallied from oversold territory, it was unable to pull through.

Instead, the RSI retraced back into its lower band (below the green line) where it continued to pull AAPL lower.

Adding to the bearish sentiment, both MAs have been tracking lower since August.

But with the RSI recently pushing up through resistance, what am I looking for next?

Emerging Uptrend

When the RSI broke up through resistance in August, that caused AAPL to bounce. That rally stalled, however, with the RSI (momentum) unable to gain any traction in its upper band.

And it’s the RSI action that I’ll be watching closely from here.

We’re looking for the RSI to get a stronger foothold than August. Then we can expect to see AAPL’s emerging rebound develop into something bigger.

But we need to note that it’s still early days with the move…

The next test for a developing upmove is for AAPL to take out its September 5 high of just under $190.

Beyond that, we’d look for the 10-day MA to cross and accelerate above the 50-day MA. This would serve as further confirmation of any emerging longer-term rally.

Regards,

Larry Benedict
Editor, Trading With Larry Benedict

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