Applied Materials Could Drop 25% in Coming Months

Applied Materials, Inc. (AMAT) stock looks vulnerable after posting an all-time high in March and could offer profitable short sales in the coming months. This is bad news for a chip sector that has lost its mojo in the summer of 2018, failing to join major indices at bull market highs. A trio of fierce headwinds is buffeting the underperforming group, which could be at the cusp of a multi-year downtrend.

The PHLX Semiconductor Index (SOX) turned lower after testing the 2000 internet bubble high in March and has failed to attract buying interest since that time, signaling a potential long-term top. Trade tensions have added fuel to the technical reversal, with semiconductors now showing up on international tariff lists. Making matters worse, chip demand and pricing may be at a cyclical peak, with profits and revenues set to decline in coming years. 

Market players may believe that broad tech strength will limit sector downside, but this group has a well-documented history of trading independently for years at a time, ignoring major benchmarks. The fruitful period following the 2000 to 2002 bear market offers a perfect example, with the Nasdaq-100 rallying to a six-year high in 2007 while the SOX topped out in 2003 and traded sideways to lower for the next five years. (For a refresher on the sector, check out: Semiconductor.) 

AMAT Long-Term Chart (1990 – 2018)

Applied Materials stock gained ground throughout the 1990s, splitting five times into April 2000 when it topped out at $57.50. It turned sharply lower with other tech stocks when the internet bubble burst, carving a multi-wave decline that came to rest near $10.00 in October 2002. A bounce into the fourth quarter of 2003 ended below the April 2002 swing high, continuing a string of lower highs that continued into the next decade. 

The bottom fell out during the 2008 economic collapse, dropping the stock to a 10-year low in the single digits, while a recovery wave into 2011 stalled at the .618 Fibonacci sell-off retracement level. It mounted that barrier in 2013, generating a buying wave that mounted the 2007 high at $23 in 2014, ending the 13-year string of lower highs. Even so, the uptrend generated little upside, stalling in the mid-$20s in 2015.

A pullback posted a higher low in the mid-teens in August 2015, setting the stage for a trend advance that mounted multiple resistance levels into November 2017, when the rally ended at the 2000 high. It tested that level in March 2018 and reversed once again, carving a steady decline that completed a double top pattern in June. The stock broke down last week, dropping to a 52-week low while signaling a primary downtrend that could reach the lower $30s. (See also: 5 Chip Stocks Facing Steep Declines.)

AMAT Short-Term Chart (2017 – 2018)

Price action probed the 2000 high five times between November 2017 and May 2018, failing to attract the buying power needed for a breakout. It then violated support at the 200-day exponential moving average (EMA), entering a positive feedback loop that signals capitulation, with shareholders exiting positions to find more profitable opportunities. It failed two attempts to remount the moving average, which has now rolled over, generating strong resistance that is typical in a new downtrend. 

On-balance volume (OBV) continues to trade above the February and April swing lows (black line), generating a bullish divergence that may support another recovery attempt. The Aug. 17 breakaway gap will mark a tough barrier if that happens, reinforced by resistance at the 50- and 200-day EMAs in the upper $40s. As a result, the gloomy technical outlook won't improve until Applied Materials stock is trading back in the $50s. (For more, see: Morgan Stanley Gets Cautious on Chip Stocks.)

The Bottom Line

Applied Materials stock has broken down from a double top, signaling a downtrend that could eventually reach the lower $30s.

<Disclosure: The author held no positions in the aforementioned securities at the time of publication.>

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