Applied Materials, Inc. (AMAT) is a semiconductor equipment company and software provider. It makes computer chips for electronic devices including flat panel TVs, smartphones, and solar products. The company reported better-then-expected earnings after the closing bell on Nov. 14, and the stock reacted with an all-time intraday high of $63.07 on Nov. 18. This was a failed test of its weekly risky level at $62.57, which was followed by an industry downgrade from UBS.

UBS expects wafer fab equipment run rates to weaken, and Applied Materials was among three semiconductor equipment companies to be downgraded. The analyst firm downgraded the stock to sell from neutral. Applied Materials stock is reasonably priced with a P/E ratio of 20.44 and a dividend yield of 1.35%, according to Macrotrends. Applied Materials has a winning streak of beating earnings per share estimates in 17 consecutive quarters.

The stock closed last week at $55.95, still up 70.9% year to date and in bull market territory at 94.3% above its Dec. 26 low of $28.79. Since the downgrade, the stock is in correction territory at 11.3% below its Nov. 18 all-time intraday high of $63.07. The stock traded as low as $55.43 on Nov. 22, holding its monthly value level at $55.69.

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 formation of a "golden cross" 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. This bullish signal tracked the stock to its all-time intraday high of $63.07 set on Nov. 18. Investors could have bought the stock on weakness to the 200-day simple moving average at $38.81 on May 13. When the stock traded as low as $28.79 on Dec. 26, that day became a "key reversal," as Applied Materials shares closed that day at $30.64, above the Dec. 24 high of $30.32.

The close of $32.74 on Dec. 31 was an important input to my proprietary analytics, and the annual value level remains at $37.57. The stock could have been bought at this level between Jan. 24 and March 8. The close of $44.91 on June 28 was another important input to my proprietary analytics. This resulted in a semiannual risky level at $55.47, which was first tested on Oct. 25. This is the pivot that held at the Nov. 22 low. The close of $49.90 on Sep. 30 was another input to my analytics, and a quarterly value level is $38.73. The close of $54.26 on Oct. 31 was another input, which resulted in a monthly pivot for November at $55.69. 

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 positive but overbought despite the near-term weakness, with the stock above its five-week modified moving average of $54.95. The 200-week simple moving average, or "reversion to the mean," is at $40.37. Note that the stock was trading around this "reversion to the mean" between the week of Oct. 12, 2018, and Jan. 18, when the average was $34.31.

The 12 x 3 x 3 weekly slow stochastic reading is 85.37 versus 88.01 on Nov. 15. At the Nov. 18 high, this reading was above 90, making the stock an "inflating parabolic bubble" before the 11.3% correction.

Trading strategy: If Applied Materials stock stays above its semiannual pivot at $55.47, the upside potential is toward the weekly risky level at $62.57. Otherwise, the risk is to the 200-day simple moving average at $45.99.

How to use my value levels and risky levels: Value levels and risky levels are based upon the last nine monthly, quarterly, semiannual, and annual closes. The first set of levels was based upon the closes on Dec. 31, 2018. The original annual level remains in play. The close at the end of June 2019 established new semiannual levels, and the semiannual level for the second half of 2019 remains in play. The quarterly level changes after the end of each quarter, so the close on Sep. 30 established the level for the fourth quarter. The close on Oct. 31 established the monthly level for November.

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. Recently, I noted that stocks tend to peak and decline 10% to 20% and more shortly after a reading rises above 90.00, so I call that an "inflating parabolic bubble," as a bubble always pops. I also refer to a reading below 10.00 as "too cheap to ignore."

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