Applied Materials (NASDAQ: AMAT) appeared on my bullish scan last night, and when I looked at the daily chart I wasn’t all that impressed. However, when I looked at the weekly chart, a pattern jumped out that leads me to believe that the stock is getting ready for a bullish run.
At first glance I thought I saw a trend channel on the weekly chart, but when I started drawing the upper and lower rails, they were not parallel. While what I thought was the lower rail connected pretty nicely, the upper rail was not parallel.
It seems that each time the stock hits the trendline connecting the weekly closing lows over the last 2 ½ years, it bounces a little higher each time. This caused what I thought was the upper rail to widen.
What also stood out is that the slow stochastic readings are reaching a point that has been the reversal point several times over the last 3 ½ years. The indicators have only gone lower than they are now on one occasion in the last two years. And the 10-week RSI is at its second lowest reading in the last 2 ½ years.
The only time the RSI and slow stochastic readings were lower in the last two-plus years was in October. When the stock reversed from that low, it jumped almost 30% in just over two months. That is quite a bounce.
The sentiment picture toward Applied Materials is mixed, with short interest being bearish and analyst ratings being bullish. The short interest ratio stands at 5.2. The number of shares sold short has been on the rise since the beginning of February and has jumped almost 15% since then. The analyst ratings show 17 “buy” ratings, four “hold” ratings and only one “sell” rating.
The company has experienced solid growth over the last few years and saw year-over-year quarterly earnings growth of 37% in its most recent earnings report. That puts Applied Materials among the leaders in the chip sector in earnings growth.
For me, the earnings growth and the technical picture are enough to compensate for the mixed sentiment picture. I like how the chart pattern is setting up for a bullish run and think the stock will move sharply higher in the next six months.
If you want to play it more cautiously, you might wait until the weekly stochastic readings make a bullish crossover. I would be comfortable buying anywhere in the $22-$23 range, with a target of at least $27.50.
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