Pattern Predicts This Semi Stock Will Soar
One of my favorite setups in the stock market takes advantage of the tendency for the sector tide to float most boats. Numerous studies have shown that a substantial percentage of a stock’s performance is linked to the performance of its sector or industry group.
In other words, if the group is doing well, then the odds that an individual stock within it will do well go up. Currently, technology, and semiconductors in particular, are doing very well.
Tech has led the market’s comeback in October, gaining 11.5% for the month compared with 8.9% for the S&P 500. Semis have done even better, up 12.4%. Talk about your rising tide.
The problem is that given the run in the past month, many stocks may have already delivered the majority of their short-term gains. My strategy is to find stocks in the group just starting to make their move, leaving them with plenty of upside potential as they play catch up.
Applied Materials (NASDAQ: AMAT) is one such stock. While the semiconductor equipment maker has been steadily moving higher since late September, it is much closer to its 52-week low than high.
Of course, we know the old saw about a rising tide floating all boats doesn’t apply when one of those boats has a hole in its hull. A stock with problems such as a serious earnings shortfall or bearish technical trend may not move up just because its sector does.
But Applied Materials has already proven it is a sound “boat.” Its chart is displaying positive momentum indicators and increasing cumulative, or on-balance, volume. And shares rallied Wednesday as analysts at Nomura raised their opinion to “buy” from “neutral” with a $22 price target.
What’s more, the current rising trend completed a double-bottom pattern similar to that seen in many stocks and sectors at the August and September lows. This “W” shape tells us selling pressures eased on the second dip, and the move above the center of the “W” tells us demand was able to overcome supply at that price.
But we should always step back and see how the pattern fits into the larger context. For that, we can look at a weekly chart below.
Support from the top of a long basing pattern in 2011 and 2012 near $14 is just under the double-bottom. Demand typically picks up at such support levels, and we can feel confident this is what happened with AMAT given the recent upside breakout from the double-bottom.
We can also use the double-bottom to forecast a likely upside target. By measuring the pattern’s vertical height and projecting that up from the breakout point we get an objective of $18.15.
Should AMAT keep moving higher, the next target — an integral multiple of the first — would be in the $19.95 area, more than 20% above the current price. This is also the 50% retracement of the February-to-September decline and close to the 200-day moving average. Remember that it is not unusual for a stock to move slightly past its major averages, so we use them as guides, not hard support and resistance levels.
I recommend waiting for the current week-long trading range to break up through $16.70 before taking a position to reduce the risk of a false breakout. But given the charts we reviewed today, it looks like this boat will continue to rise for the next few weeks.
Recommended Trade Setup:
— Buy AMAT above $16.70
— Set stop-loss at $16
— Set initial price target at $18.15 for a potential 9% gain in three weeks
— Set secondary price target at $19.95 for a potential 19% gain in six weeks
Note: A little- known indicator has pegged stocks that delivered double-digit gains in a month no less than 33 times — with those gains reaching as high as 83%. The people who came up with it agreed to share it with a select few investors for free. Click here if you’d like to be one of them.