I Am Slightly More Bearish Than Bullish on Applied Materials

 | Aug 08, 2017 | 10:47 AM EDT
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The last time we updated our outlook on Applied Materials Inc. (AMAT) was the end of May, and we gave a bullish strategy: "I like the price action and the current technical state of the indicators for AMAT. Longs should risk a close below $37 now. If prices pull back to $42, I would use that dip to start a long position or buy more if you are already long."

With the benefit of hindsight, we can see that prices did pull back to $42-$41 by the end of June and prices rallied into July. Prices have pulled back again towards $42, but our indicators have weakened, so a new strategy may be in order. Let's review our updated charts and indicators below.

In this daily bar chart of AMAT, above, we can see what could be considered a double top formation, with peaks in June and July. A breakdown below the trough in late June around $41 is needed to complete the pattern. Putting on a bullish hat in place of a bearish hat, we could view the price action since May as a high level consolidation pattern.

A close above $48 would be needed to complete that pattern. Price patterns can sometimes be clarified by looking at a number of indicators. The slope of the 50-day moving average line has turned down this month, but the slope of the slower-to-react 200-day line is still positive. The volume of trading can sometimes be higher around the two peaks of a double top, and the volume typically diminishes in a consolidation pattern.

Neither pattern is supported by the volume pattern, unfortunately. While volume does not confirm a top, the daily On-Balance-Volume (OBV) line does show two small peaks in June and July. Looking at the Moving Average Convergence Divergence (MACD) oscillator, in the bottom panel we can see much lower readings and a bearish crossover versus the reading in early June.

In this weekly bar chart of AMAT, above, we can see the two rally attempts and failures in the $46-$48 area. Prices are above the rising 40-week moving average line, which did a good job in getting you in fairly early in the advance. The weekly OBV line shows a small double top, while the MACD oscillator on this timeframe is in a bearish mode after a crossover signal in June.

In this Point and Figure chart of AMAT, above, we can see the twin peaks up at $47.59. A decline to $42.23 will be a new short-term low and could set up a deeper decline and test of the $40.99 low. A break of $40.99 could mean a decline to the $39-$38 area.

Bottom line: chart interpretation and indicator analysis is not black and white, at least not the way I see it. The charts and indicators of AMAT are not clearly bearish or bullish, but with prices near the middle of a $41-$48 range, one could spin things either way. I prefer to lean to the bearish side right now. Longs might want to have a stop and reverse order below $41.

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