Applied Materials, Inc. (AMAT) is a semiconductor equipment company and software provider that is set to report quarterly earnings results after the closing bell on Thursday, May 16. It makes computer chips for electronic devices including flat panel TVs, smartphones and solar products.
The stock has had a solid performance so far in 2019, up 26.8% year to date and in bull market territory at 44.1% above its Dec. 26 low of $28.79. In the longer term, the stock had a difficult 2018 and is currently in bear market territory at 33.5% below its March 12, 2018, high of $62.40. The stock set its 2019 high of $45.75 on April 25 and then dipped to a test of its 200-day simple moving average at $39.81, a short-term decline of 12.9%. This type of volatility will likely result in a volatile reaction to earnings.
Analysts expect the company to post earnings per share of 66 cents when the company reports results Thursday afternoon. The stock has a favorable P/E ratio of 9.53 and offers a dividend yield of 2.00%, according to Macrotrends. Susquehanna Financial upgraded the stock to positive on Wednesday, pointing to increasing demand for wafer fabrication equipment for delivery in 2020. Susquehanna raised its price target to $60 from $34. The highest upside potential in my analysis is a quarterly risky level at $49.33.
The daily chart for Applied Materials
The daily chart for Applied Materials shows the bear market trend that ended on Dec. 26 with the low of $28.79. The stock closed that day at $30.64, above the Dec. 24 high of $30.32, which defines a "key reversal" and indicates that a tradeable rally will follow.
The close of $32.74 on Dec. 31 was input to my proprietary analytics, and the annual value level remains at $37.57, with a semiannual pivot at $41.35. The stock closed Wednesday, May 15, at 15 cents above the semiannual level. The March 29 close at $39.66 was another input to my analytics, and the stock's quarterly risky level is $49.33. The April 30 close of $44.07 is the latest input to my analytics, and the value level for May is $34.04.
Note that a "golden cross" was confirmed on April 4, when the 50-day simple moving average rose above the 200-day simple moving average to indicate that higher prices lie ahead. The low of $38.67 on May 13 was an opportunity to buy the stock at its 200-day simple moving average at $38.81.
The weekly chart for Applied Materials
The weekly chart for Applied Materials will be negative given a close this week below its five-week modified moving average of $41.85. The 200-week simple moving average, or "reversion to the mean," at $36.07 is a buy level. The 12 x 3 x 3 weekly slow stochastic reading is projected to end this week at 74.78, down from 82.64 on May 10 and moving below the overbought threshold of 80.00.
Trading strategy: Buy Applied Materials shares on weakness to the annual and monthly value levels at $37.57 and $34.04, respectively, and reduce holdings on strength to the quarterly risky level at $49.33. The semiannual pivot at $41.35 should remain a magnet.
How to use my value levels and risky levels: Value levels and risky levels are based upon the last nine weekly, monthly, quarterly, semiannual and annual closes. The first set of levels was based upon the closes on Dec. 31. The original semiannual and annual levels remain in play. The weekly level changes each week; the monthly level was changed at the end of January, February, March and April. The quarterly level was changed at the end of March.
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.
Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.