I am not sure if it was the Merrill Lynch downgrade from buy to neutral or the iPod nano screen problems that led to the sharp decline in Apple Computer (AAPL) but the reaction was sharp with the shares dropping close to 5% on well above average volume. I’m no technician but the chart definitely looks broken, at least for the very short term.
I read through the new Merrill report. It is very well done. It is also not really a negative piece…..

….Merrill transitioned AAPL coverage to a new analyst who decided to move to a neutral opinion. The core of the downgrade concerns the risk of slowing momentum and how it relates to what the analyst sees as a full valuation. That said, the analyst notes that fundamentals are quite strong and that he is adopting what he sees as a conservative view relative to the halo effect. On iPod penetration, he just seems worried about to how to factor a slowing growth rate due to the rapidly growing installed base. Estimating a slowdown off of a growth rate in excess of 100% is difficult and in consumer electronics there is a pattern of rapid and unforeseen shifts in demand for certain products.
Getting back to the Merrill report, I found the data on the halo effect most interesting. The analyst believes it is real but due to the upcoming Intel transition and Microsoft’s introduction of the big Windows upgrade, he is assuming the halo effect may pause slightly as measured by gains in PC market share for the Mac platform. Here is some data from the report: