Running my scans over the last few nights, there have been a number of semiconductor companies on the bullish list. One that stood out was Applied Materials (NYSE: AMAT). While it was on the daily bullish scan, it was the weekly chart that caught my attention, along with the sentiment indicators.
As with many stocks I have featured over the last few weeks, AMAT is in an upward sloped trend channel. The stock ran into resistance in recent weeks at the upper rail of the channel and pulled back as is the case with most stocks. The stock hasn’t reached the lower rail of the channel yet, but it isn’t that far away either.
The other thing that stood out on the weekly chart was the pattern in the 10-week RSI over the last year and a half. Each time the indicator has been in the vicinity of the 50 level, the stock has rallied. In three of the four instances, the stock rallied at least 20% and in the fourth case it rallied just over 9%.
With the stock being near its high for the past 10 years, I decided to look at the monthly chart as well to make sure there weren’t any immediate resistance levels that could come into play. Looking back, the nearest layer of resistance from a former high is up at $21.85, which is 15% above the current level. This is a good time to point out how you want to look at multiple charts. Don’t just look at the daily and no other charts, or don’t just look at the weekly chart. You have to look at different timeframes to make sure you get the whole picture of what is going on.
Turning our attention to the sentiment toward Applied Materials stock, we see a certain amount of skepticism. The short interest ratio is currently at 5.0 which is leaning toward the moderately high level. Not only is the current reading the highest it has been in the past year and the number of shares sold short has doubled since December.
The analysts are also moderately bearish on the stock with 11 of the 21 analysts that follow the stock having it rated as a “h0ld” or a “sell”. This leaves plenty of room for upgrades.
The fundamentals are pretty strong for Applied Materials stock as well. The company’s EPS rating in Investor’s Business Daily is an 89 which means that it has performed better than 89% of the publicly listed companies from an earnings standpoint. Over the last three quarters, AMAT has averaged earnings growth of 158%.
The bottom line for Applied Materials stock is that there is more upside reward than there is downside risk at this point in time. I look for the stock to gain at least 15% or more in the next few months. A close below the lower rail of the channel would be a clear sign to exit the trade.
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