Saturday, November 10, 2012

The Next Phase of the Apple Bubble

The next phase of the "Apple Bubble" has commenced. After peaking at $704 a share in late September 2012 and completing the ending diagonal that started in late May 2012, the retracement of the ending diagonal is in progress. The retracement of the ending diagonal is unfolding quite fast with two important support levels already taken out on the way down. In spite of the fast decline, there is a case to be made that the "Apple Bubble" did not burst and that new highs will be reached in the future.

Here is a close-up chart of Apple, showing the ending diagonal and the retracement in progress:

The first important support level that was broken after the peak was reached is the lower trend channel associated with Minor wave 5 of Intermediate wave (3) up. A clean break through the lower trend channel was the first sign of a trend change at Minor degree from up to down. The second important support level that was broken is the lower wedge line associated with the ending diagonal. Notice the acceleration in selling pressure that took place after the lower wedge line was broken -- this is very indicative of a wedge collapse in progress.

A close examination of the structure of the decline from the peak shows that the structure is corrective. This means that the "Apple Bubble" has not burst yet, and the bursting event is still in the future. The wedge collapse is unfolding as a double zigzag, meaning that it would be wave A of a triangle or (much more likely) an expanded flat. The structure is most likely Minor wave A of a larger expanded flat. Within Minor wave A, Minute waves [w] and [x] are completed as per the preferred count, and the second zigzag, Minute wave [y], is still unfolding. A relationship of Minute wave [y] = 2.618 * Minute wave [w] would give a downside target of 452 for the end of Minor wave A. The ideal time for the end of the wedge collapse is December 4, 2012, which would make the time needed to complete the wedge collapse half of the time needed to construct the ending diagonal.

The larger picture is that Intermediate wave (4) down is in progress, unfolding as an expanded flat, which would then be followed by a five wave advance, Intermediate wave (5) up, which would also end the advance at Primary and Cycle degree as well. Here is a chart of Apple updating the larger picture:

The final stage of the "Apple Bubble" should start around June 2013 and last for 1 year, ending around June 2014. A final upside target of $875 to $1000 a share at the peak of the bubble is still in play. Once the final stage of the bubble is completed, the bubble will burst. The ripple effect from the bursting of the "Apple Bubble" will be global -- Just as the South Sea Company was a global bellwether in 1720, Apple is a global bellwether now, so the bursting of the bubble will result in financial fallout on a global scale, including the implosion of the job market throughout the Western World. The unraveling of the bubble should be quite swift, with the company's stock losing perhaps 90% of its value by June 2016.

The final stage of the "Apple Bubble" will play a central role in fueling a powerful rally in the stock market from June 2013 to June 2014, propelling the S&P 500 from 925 to 1550 and the DJIA from 9300 to 14400, as well as a robust wave 2 bounce in the Nasdaq and Nasdaq 100. Once the "Apple Bubble" bursts, the rally will unravel very fast, dropping the DJIA down to 5500 and the S&P 500 to around 525 by June 2016.

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