Applied Materials Streak Ends and Stock Is Below Key Level - Here's the Trade

Buy Applied Materials on weakness to the 200-week SMA at $44.69 and reduce holdings on strength to its 200-day SMA at $54.04.
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Applied Materials  (AMAT) - Get Report missed earnings estimates, ending a winning streak of 18 quarters, and the stock opened Friday below its 200-day simple moving average at $54.03.

The company withdrew its guidance as the coronavirus is disrupting its supply chain and manufacturing. For additional coverage read this story on TheStreet.com.

The stock opened Friday at $53.16, down 13% year to date and in bear-market territory 23% below its all-time intraday high of $69.44 set on Feb. 13. 

The stock is also in bull-market territory 45% above its March 18 low at $36.64.

The Santa Clara, Calif., semiconductor-equipment company and software provider makes computer chips for electronic devices such as flat-panel TVs, smartphones and solar products.

The stock is reasonably priced with a p/e multiple of 16 and a dividend yield of 1.63%, according to Macrotrends.

The Daily Chart for Applied Materials

Daily Chart for Applied Materials

Daily Chart for Applied Materials

Courtesy of Refinitiv XENITH

The daily chart for Applied Materials shows the stock above a golden cross. That level was confirmed on April 4, 2019, when the 50-day simple moving average rose above the 200-day simple moving average. Such a move indicates that higher prices lie ahead.

Investors could have bought the stock on weakness to the 200-day SMA at $38.81 on May 13, 2019.

The buy signal tracked the stock to its all-time high of $69.44 set on Feb. 13.

This high was a test of its semiannual risky level at $69.02, where profits could have been taken.

The stock failed to hold its 50-day SMA on Feb. 24, then failed to hold its annual pivot at $58.38 on March 6.

The stock failed to hold its 200-day SMA on March 11, which tracked the stock to its March 18 low of $36.64.

The rebound from there failed at the 200-day SMA, now at $54.04.

The Weekly Chart for Applied Materials

Weekly Chart for Applied Materials

Weekly Chart for Applied Materials

Courtesy of Refinitiv XENITH

The weekly chart for Applied Materials is positive, with the stock above its five-week modified moving average of $51.11. 

It’s also above the 200-week simple moving average, or reversion to the mean, at $44.69. 

Note that the stock was trading around this reversion to the mean between the weeks of March 20 and April 3.

The 12x3x3 weekly slow stochastic reading is projected to rise to 42.53 this week  from 39.56 on May 8.

Trading Strategy: Buy Applied Materials on weakness to the 200-week SMA at $44.69 and reduce holdings on strength to its 200-day SMA at $54.04.

The annual pivot at $58.38 should limit the upside for the rest of the year.

How to use my value levels and risky levels:

The closes on Dec. 31, 2019 were inputs to my proprietary analytics. Semiannual and annual levels remain on the charts. Each uses the last nine closes in these time horizons.

The second quarter 2020 level was established based upon the March 31 close.

The monthly level for May was established based upon the April 30 close.

New weekly levels are calculated after the end of each week.

New quarterly levels occur at the end of each quarter. Semiannual levels are updated at mid-year. Annual levels are in play all year long.

My theory is that nine years of volatility between closes are enough to assume that all possible bullish or bearish events for the stock are factored in.

To capture share price volatility investors should buy on weakness to a value level and reduce holdings on strength to a risky level. A pivot is a value level or risky level that was violated within its time horizon. Pivots act as magnets that have a high probability of being tested again before its time horizon expires.

How to use 12x3x3 Weekly Slow Stochastic Readings:

My choice of using 12x3x3 weekly slow stochastic readings was based upon back-testing many methods of reading share-price momentum with the objective of finding the combination that resulted in the fewest false signals. I did this following the stock market crash of 1987, so I have been happy with the results for more than 30 years.

The stochastic reading covers the last 12 weeks of highs, lows and closes for the stock. There is a raw calculation of the differences between the highest high and lowest low versus the closes. These levels are modified to a fast reading and a slow reading and I found that the slow reading worked the best.

The stochastic reading scales between 00.00 and 100.00 with readings above 80.00 considered overbought and readings below 20.00 considered oversold.

A reading above 90.00 is considered an “inflating parabolic bubble” formation that is typically followed by a decline of 10% to 20% over the next three to five months.

A reading below 10.00 is considered as being “too cheap to ignore” which typically is followed by gains of 10% to 20% over the next three to five months.

Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.