Despite Bullish Headlines, Applied Materials Looks Risky

 | Aug 17, 2017 | 1:32 PM EDT
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Applied Materials Inc. (AMAT) has been struggling lately. We discussed the chart picture and indicators just about a week ago. At that time we said: "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."

Looking closer at the price action this week, I still want to lean to the bearish side, even though we are no closer to a breakdown. Let's take a fresh look at the chart and indicators.

In this daily bar chart of AMAT, below, we can see that the share price has been so far unable this month to make a sustained move above the now declining 50-day moving average line. A close back below $42 would be a new low close for the move down and would weaken the chart picture. The volume pattern has weakened in the past two to three months. Volume is heavier in June as prices declined, and does not increase in July when prices rallied. A bullish pattern would be lighter volume on the decline and increasing volume on the rally, but we don't see it.

The On-Balance-Volume (OBV) line peaked in early June and has been slowly working lower, telling us that sellers of AMAT are taking their time in liquidating. The bottom panel shows the movement of the Moving Average Convergence Divergence (MACD) oscillator below the zero line (bearish), and trying to cross to the upside for a cover-shorts signal. The two moving averages of this indicator have narrowed, but they might not cross right away.

In this weekly chart of AMAT, above, we can quickly see why investors have loved AMAT. Prices have tripled from their 2015 nadir. Few people actually buy the extreme low and hold on for the zenith, but it is nice to think it can be done. Prices are above the rising 40-week moving average line. The weekly OBV line turned up in August of 2015, and only in recent months has the line turned neutral. The weekly Moving Average Convergence Divergence (MACD) peaked in late May and is still in a bearish mode.

In this Point and Figure chart of AMAT, above, we can look closer at the price action since May (look for the "5"). The chart shows two strong attempts to move higher that were rejected. Drawing an imaginary line across the middle of the recent consolidation shows more price reversals in the upper half of the pattern -- and thus it should be considered to be distribution or selling into strength. The chart gives a downside price objective of near $38.

Bottom line: It looks like a decline to $41.81 (a new low on the Point and Figure chart, above) would weaken the chart and could precipitate further selling. Traders should stand aside on AMAT if they only trade from the long side.

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