Applied Materials Selloff Finds the Stock Stretched and Ready to Snap Back
The concept of a “rubber band trade” is that when the price moves significantly in one direction it becomes stretched. Applied Materials, Inc (NASDAQ: AMAT) is down significantly since mid-August and finds itself in a position to snap back to it moving average.
One of the ways to gauge if the price is stretched is to use the Keltner Channel. This indicator utilizes an exponential moving average with upper and lower volatility bands. These bands are set a predetermined multiple of the Average True Range (ATR). The ATR indicator accounts for the intraday range of the price as well as any gaps overnight that might be larger than the intraday range. Using a 50-day Keltner Channel with the volatility bands set to four ATR, you’ll see that the price is trading below the lower band.
The Keltner Channel accounts for how far the price has traveled but not the intensity. By using a 10-day Stochastics RSI indicator will help solve this problem. This indicator uses the Stochastics calculation on the RSI indicator to smooth it out. It has both a fast and slow line reflected in the %K and %D calculation of the Stochastics. An extreme move would push both lines below 10 or above 90 on the same day for extreme moves. For AMAT, both lines are currently positioned below 10.
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Finally, another indicator that would indicate a strong directional move is the 5-day Aroon Oscillator. This indicator looks at the high and low of the price relative to its look back period. A five day setting would require a very directional move higher or lower to reach its 100 to -100 extremes. For AMAT, the indicator reached -100 on Wednesday.
The combination of closing below the lower Keltner Channel, the Stochastics RSI falling below 10 and the Aroon Oscillator at -100 indicates a very extreme bearish position. A reversion to the mean would indicate a retest of the 50-day exponential moving average. The current level and target are near $63.
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