Chart of the week: Is Tech sector on edge of precipice?

An expected decline could be devastating, according to the charts, and Apple could lead the way.

Will Apple continue to follow my roadmap?

I thought I would review this perennial favourite since I believe we are on the cusp of a decline in the Nasdaq (of which Apple (NASDAQ:AAPL) is one of its top constituents) that will take many tech shares lower.

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

I labelled the $233 high in October last year as the final fifth wave of the entire bull run since its IPO.  The first large wave down is an 'a' wave, the bounce off that low is a 'b' wave and the current decline is part of the unfolding 'c' wave.  

If these labels are correct, then following any upcoming bounce, the market should decline hard in what is likely to be a third wave, which would be devastating in scope.

And this is what I wrote then:

"My best guess here (latest $175) is for a continued dip to the $170 area, then a bounce to perhaps the $190 - $195 and then a very sharp decline to test the low at $140.  Much lower potential exists and last year's $233 top seems very secure."

• Chart of the week: Could Apple lose 25% of its value?

And here is the updated chart:

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

Bingo!  The market dipped to a low of $170.50 one day after my Chart of the week column and then staged a very strong recovery.  That reversal occurred bang on my target.  And, in fact, the ensuing rally was so strong it carried above my target zone of $190-$195 to a high on Friday at $208.

But that's OK, it only added to profits for a terrific swing trade!

Of course, if you were stalking this market and had bought at my $170 low, you would have set a close stop and be in the money by $38 (22%).

Now that I had very accurately set the roadmap since early June, what is the outlook from here, I hear you ask.

For one thing, at Friday's $208 high it made an accurate hit on the new blue trendline drawn off the two previous highs.  This now becomes a line of strong resistance.

For another, a large momentum divergence has been building on the rally – and that spells weakness ahead.

And for another, there is now a weekly key reversal, which is often a reliable reversal signal at the end of a strong move.  A key reversal is a feature where the close at the end of the week is lower than the previous week's close and a new high has been made in between.  Last week's action certainly fits the bill.

And fourth, Friday's action closed a small gap near the 'b' wave high. Remember, gaps often act as magnets and, once closed, the market reverses.

The bottom line is that I expect my $140 target to be reached on this leg down, and so this current market is an opportunity to abandon any long positions and reverse to short. I will take Friday's $208 high as my fail-safe.

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.