AMAT has a bullish trendline in play ahead of the tech company’s earnings report
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Senior V.P. of Research Todd Salamone sent us an intriguing Applied Materials Inc (NASDAQ:AMAT) chart earlier this week. This comes ahead of the semiconductor supplier’s fiscal third-quarter earnings, due out after the market closes on Thursday, Aug. 14.
AMAT’s recent pullback from scraping $200 in late July could be the handle of a “cup-and-handle” pattern. We’ve seen this pattern in many individual stocks in recent weeks. In some cases, the “handle,” aka pullback, finds support in the vicinity of the underlying’s 50-day moving average. This precedes a breakout above the rim, which in AMAT’s case happens to be that round $200 level.
Cue the alarm bells and eye emojis.
In the chart below, the shares are also holding the $175 level, which marked a low back in September of last year and was resistance as recently as May. A share buyback plan announced in March could be supportive on a macro level, although there typically isn’t buyback activity in the days leading up to an earnings report, so keep that in mind.
A share buyback plan announced in March could be supportive, although there typically isn’t buyback activity in the days leading up to an earnings report, so keep that in mind.
For what it’s worth, in the last five years, the stock has averaged a nearly 8% return 21 trading days after “pullbacks” to its 50-day moving average. By “pullbacks,” we mean the shares are above the trendline at least 80% of the time during the last two months and above it at least eight of the past 10 trading days.
There’s a tremendous amount of pessimism around Applied Materials, at least from an options perspective. Speculative players have been buying to open puts relative to calls at a quicker-than-usual clip. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the stock’s 10-day put/call volume ratio of 2.37 ranks four percentage points from an annual high. Echoing this, AMAT’s Schaeffer’s put/call open interest ratio (SOIR) of 1.17 sits in the 87th percentile of its annual range, indicating that near-term traders have rarely been less call biased in the past 12 months.
We’ll always try to mention risks that look obvious. One that sticks out like a sore thumb is AMAT’s dismal post-earnings history over the last two years. Per Trade-Alert, five of the stock’s last eight post-earnings moves have been negative, including a 5.3% bear gap back in May. Overall, the equity averaged a post-earnings move of 4.9% — regardless of direction — in the last two years. This time around for Friday the 15th, the options market is pricing in a larger-than-usual post-earnings move of 7.3%, regardless of direction.
Idea: Take a flier on buying out-of-the-money (OOTM) short-term puts to hedge earnings risk, and a longer-term call to leverage the intriguing technical setup outlined above.
UPDATE: Since Todd flagged AMAT, the stock gapped higher by 2.8% on Aug. 7 and closed the week up xx. There’s still room to run, but that cup-and-handle pattern is much more confirmed now. Keep those late-week gains in mind for your models, folks!
Other Stuff We Saw This Week:
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