Apple Inc. (NASDAQ: AAPL)

A Head and Shoulders (H&S) pattern is a reversal pattern that forms after an uptrend. A textbook H&S pattern starts to form when a stock rallies to a point and then pulls back to a particular level (left shoulder). Next, the stock will rally again, but this time to a higher peak (head) than the previous one. After forming the head, the stock will pull back to the same support that the first shoulder did. Finally, the stock rallies a 3rd time, but not as high as the head (right shoulder). The level that has been created by all 3 of the pullbacks is simply a support level referred to as the "neckline". The formation of an H&S pattern warns of a potential reversal of the uptrend into a possible downtrend.

Apple, Inc., together with subsidiaries, designs, manufactures, and markets mobile communication and media devices, personal computers, and portable digital music players; and sells related software, services, peripherals, networking solutions, and third-party digital content and applications worldwide. Its products and services include iPhone, iPad, Mac, iPod, Apple TV, the iOS and Mac OS X operating systems, iCloud, and various accessory and support offerings, as well as a range of consumer and professional software applications. The company sells its products and services to consumers, small and mid-sized business, education, enterprise, and government customers through its retail stores, online stores, and direct sales force, as well as through third-party cellular network carriers, wholesalers, retailers, and value-added resellers. In addition, it offers various third-party iPhone, iPad, Mac, and iPod compatible products, including application software, printers, storage devices, speakers, headphones, and other accessories and peripherals, through its online and retail stores; and digital content and applications through the iTunes Store, App Store, iBookstore, and Mac App Store.

To review the H&S pattern that has formed on Apple's stock, please take a look at the 1-year chart of AAPL (Apple, Inc.) below with my added notations:

AAPL has been on a 4-month rally since its April-May correction. Over the last (2) months, AAPL has created a very important level at $650 (blue), which would also be the "neckline" support for the H&S pattern. Above the neckline you will notice the H&S pattern itself (red). Confirmation of the H&S occurred when AAPL broke its $650 "neckline" support. The stock should be moving lower from here.

Keep in mind that simple is usually better. Had I never pointed out this H&S pattern, one would still think this stock is moving lower simply if it broke below the $650 support level. In short, whether you noticed the pattern or not, the trade would still be the same: On the break below the key $650 level.