Applied Materials Stock at 'Reversion to the Mean'

Applied Materials, Inc. (AMAT) manufactures computer chips, and the stock has gone from being in an "inflating parabolic bubble" a year ago to being "too cheap to ignore" now as the company reports quarterly results.

During the week of Nov. 17, 2017, the stock had a stochastic reading of 92.57, above 90.00, which is my definition of an "inflating parabolic bubble." The stock set its all-time intraday high of $62.40 on March 12, 2018, and then plunged by 51% to its 2018 low of $30.53 on Oct. 29. The stock had a stochastic reading of 9.12 during the week of Nov. 2, below 10.00, which is my definition of a stock that is "too cheap to ignore." Applied Materials closed Wednesday, Nov. 14, at $33.58 down 34.3% year to date and in bear market territory at 46.2% below its all-time high of $62.40 set on March 12. Since the low of $30.53 set on Oct. 29, the stock is up 10%.

Analysts expect Applied Materials to post earnings per share between 96 cents and 99 cents when the company report results after the closing bell on Thursday, Nov. 15. The stock had a positive reaction to earnings on Feb. 14, prompting the rally to the all-time high. A negative reaction following its earnings release on May 17 led to a "death cross" on June 5. Then, on Aug. 16, a negative reaction to earnings led to the 2018 low. The company is expanding beyond semiconductors, and new display technologies could drive a positive reaction to earning on Friday.

The daily chart for Applied Materials

Courtesy of MetaStock Xenith

The daily chart for Applied Materials shows that the stock has been below a "death cross" since June 5, when the 50-day simple moving average fell below the 200-day simple moving average, indicating that lower prices would follow. The stock could have been sold at $53.04 on that date. A bearish warning occurred on the negative reaction to earnings on Aug. 16, when the stock gapped below my semiannual pivot of $44.97.

The weekly chart for Applied Materials

Courtesy of MetaStock Xenith

The weekly chart for Applied Materials is negative but oversold, with the stock below its five-week modified moving average of $35.79 and just below its 200-week simple moving average at $33.89, which is also the "reversion to the mean." The 12 x 3 x 3 weekly slow stochastic reading is projected to end this week at 16.69, up from 12.46 on Nov. 9. A weekly close above $35.79 would be positive following earnings.

Given these charts and analysis, my strategy is to buy Applied Materials shares on weakness to my monthly value level at $30.92 and reduce holdings on strength to my annual and semiannual risky levels of $37.61 and $44.97, respectively.

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