Interactive Investor

Chart of the week: has Apple finally reached its peak?

Apple led the tech market rally, but its shares now look overvalued and a crash might be coming.

10th August 2020 12:56

John Burford from interactive investor

Apple led the tech market rally, but its shares now look overvalued. Our technical analyst believes a crash might be coming.

Most say that picking market tops is a fool’s game – and most of the time they are right.

Get the timing wrong and much egg lands on your face. Get it right and everyone says “it was obvious” after the event - with few plaudits awarded to the hapless forecaster.

With this unpromising scenario, I find I cannot resist the urge to call a high in Apple (NASDAQ:AAPL), as the undoubted leader of the stunning market rally of recent years.

Apple is one of the handful of big name US tech shares many consider ‘must have’ holdings. Even Warren Buffett – who famously shunned tech in the 1990s boom years – has a massive holding.

So with everyone and his dog owning shares, it is a stunning fact that its market cap now is almost 90% of the entire cap of the Russell 2000 index (an index of 2,000 of the largest US domestic companies). Never has a single stock reached these giddy heights in comparison with a major index – not even IBM in 1979, when it ruled the tech roost.

Take a moment to reflect on that. And remember, all Apple does is sell (very expensive) communication devices that almost everyone on the planet owns in one form or another. And it is not short of competitors!

A very good case can be made that Apple shares are hugely overvalued and buying (or holding) them here represents a very poor risk/reward outlook.

So what evidence do I have to suggest the top is nigh? Here is the long-term monthly chart showing the exponential rocket-like surge that is typical of the late stages of a buying mania:

Source: interactive investor. Past performance is not a guide to future performance.

I have yet to see a vertical wall resolve in a whimper – they always result in a crash. That is what the odds favour with Apple, difficult to believe though it may be for many, who may view this as heresy.

Looking at the shorter-term picture:

Source: interactive investor. Past performance is not a guide to future performance.

I have a potentially complete five waves in at least two degrees of scale on the Elliott Wave picture. That is a clear indication that a major turn approaches and any upside from here is extremely limited. A downside correction could quickly shave at least 10-15% off the value, with bigger corrections possible.

My best guess is that if it can breach the $350 support in the days and weeks ahead, the Corona Crash low at $200 will be within sight. In any case, taking major profits here would be prudent.

Bullish investors who may be carried away by their supreme confidence should remember the Golden Rule of investing – to prosper, Buy Low and Sell High. The ‘Sell High’ part is usually the most difficult to achieve emotionally.

For more information about Tramline Traders, or to take a three-week free trial, go to www.tramlinetraders.com

John Burford is the author of the definitive text on his trading method, Tramline Trading. He is also a freelance contributor and not a direct employee of interactive investor.

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