Applied Materials, Inc. (AMAT) beat earnings per share (EPS) estimates for its first quarter, but the positive reaction of the stock failed at its 200-day simple moving average (SMA) at $53.97 on April 29. The semiconductor equipment company and software provider makes computer chips for electronic devices such as flat panel TVs, smartphones, and solar products.

Applied Materials stock closed last week at $49.68, down 18.6% year to date and in bear market territory at 28.5% below its 52-week high of $69.44 set on Feb. 13. The stock is also in bull market territory at 35.6% above its March 18 low of $36.64.

The stock is reasonably priced with a P/E ratio of 15.43 and a dividend yield of 1.69%, according to Macrotrends. The company has beaten EPS estimates in 18 consecutive quarters.

The daily chart for Applied Materials

Daily chart showing the share price performance of Applied Materials, Inc. (AMAT)
Refinitiv XENITH

The daily chart for Applied Materials shows the stock above a golden cross that was confirmed on April 4, 2019, when the 50-day SMA rose above the 200-day SMA to indicate 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 golden cross tracked the stock to its all-time intraday 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.

Applied Materials stock failed to hold its 50-day SMA on Feb. 24 and then failed to hold its annual pivot at $58.38 on March 6. The stock failed its 200-day SMA on March 11, which tracked Applied Materials to its March 18 low of $36.64. The rebound from there failed at the 200-day SMA now at $53.97.

The weekly chart for Applied Materials

Weekly chart showing the share price performance of Applied Materials, Inc. (AMAT)
Refinitiv XENITH

The weekly chart for Applied Materials is neutral, with the stock below its five-week modified moving average of $50.26. It is above the 200-week SMA, or "reversion to the mean," at $44.42. Note that the stock was trading around this "reversion to the mean" between the weeks of March 20 and April 3. The 12 x 3 x 3 weekly slow stochastic reading ended last week at 37.26, up from 34.60 on April 24.

Trading strategy: Buy Applied Materials shares on weakness to the 200-week SMA at $44.42 and reduce holdings on strength to the 200-day SMA at $53.97.

How to use my value levels and risky levels: The closing prices on Dec. 31, 2019, were inputs to my proprietary analytics. Semiannual and annual levels remain on the charts. Each calculation uses the last nine closes in these time horizons.

The second quarter 2020 level was established based upon the March 31 close, and the monthly level for May was established based upon the April 30 close. New weekly levels are calculated after the end of each week, and new quarterly levels occur at the end of each quarter. Semiannual levels are updated at mid-year, while annual levels remain 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 shares 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 their time horizon expires.

How to use 12 x 3 x 3 weekly slow stochastic readings: My choice of using 12 x 3 x 3 weekly slow stochastic readings was based upon backtesting 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 "too cheap to ignore," which is typically followed by gains of 10% to 20% over the next three to five months.

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