US stocks back under pressure as Apple slumps

Summary:

• Monday saw US stock experience the largest sell-off this month
• US500 has declined for 3 consecutive days
• Apple shares sink as banks cut forecasts

The recovery seen in US stocks since last month’s low is facing its first real test after the markets came under some pretty heavy selling pressure yesterday. The S&P500 (US500 on xStation) suffered its largest decline of the month so and fell over 70 points from high to low. In closing lower the market posted a 3rd consecutive red candle on D1 and furthermore the 3rd time in as many days that price has made lower highs and lower lows - also note that today the market has already made a new low and would need quite the bounce to not make a lower high beneath 2795.

The US500 sold heavily on Monday to mark a 3rd consecutive down day and in doing so the market also fell back below the 200 day SMA (Purple line). Source: xStation

The impressive bounce from the 2603 low at the end of October which culminated in a strong push up to 2818 the day after the Midterms is now looking vulnerable as price has once more dropped below the 200 day SMA. A second shoulder in a possible inverse head and shoulders could be forming here but for that setup to be valid a break above the neckline around 2824 is required. More pressingly at present is the downside risk with daily lows of 2719 an obvious level to keep an eye on. Should this be broken below then another flush may lie ahead with a retest of the 2603 low then looking likely. If this occurs then how price reacts around these lows will be key and would likely determine how we trade into year-end.

While large tech stocks such as Amazon and Facebook were crushed during the rout last month, Apple held up relatively well with the stock remaining well supported by and large. However, a surprisingly downbeat assessment of the firm’s future prospects following the release of third quarter results saw a large drop, but fortunately for investors this coincided with the broader market bottom and as sentiment improved the stock recovered. However, recent days have seen the price come back under some heavy pressure with several sizable gaps lower as banks downgrade their price targets for Apple.

Apple has fallen back to test the 195 breakout level which also coincides with the 200 day SMA. Previous dips to this SMA have represented good buying opportunities but a failure to find support here could spell trouble not just for Apple investors but also the broader US stock market. Source: xStation

Goldman Sachs now has a “neutral” rating on the stock with a target of $209, down from $222 previously. Goldman believe that Apple will produce 6% fewer iPhones next year than previously expected after key supplier Lumentum reduced its shipment outlook. This downgrade comes hot on the heels of a similar move by JP Morgan which also cited expected declines in iPhone shipments for this year and next and reduced its target to $266 from $270 - but perhaps importantly kept its rating at overweight.

Broadly speaking this weakness in Apple has come at a bad time as investors and analysts often see the stock as a bellwether for the US market. Price has now come back to a potentially pivotal level with the market retesting the 195 level where it made a strong break higher from back in the summer. This region also coincides with the 200 day SMA which could be seen to further heighten the significance of the level. Given that it is arguably the most watched stock on the S&P500, its not only Apple investors who will be watching closely as a further drop lower could well sour broader sentiment for the index.