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Look for AMAT to settle out at $44.33

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At 10:30, Jeff Canavan looked at Applied Materials (NASDAQ:AMAT) on the point and figure chart. Let's take a look at retracement levels to get a feel for what market makers may be doing with the stock ahead of tonight's earnings report.

Applied Materials Chart - last 8 months

For the past three session's, shares of AMAT have been hovering around the 61.8% retracement level near $44.33, and I'm thinking this is a level where the stock will settle into today's close, just ahead of earnings. We'll be monitoring the stock closely to get a feel for how things pan out. Should the stock start getting away to the downside (below $43.35) I'd be thinking that the company is not going to be giving much favorable guidance for the near-term future. It sure looks like market makers got defensive with the stock at the upper end of our retracement bracket ($54-$58) and the stock now trades closer to the lower end of retracement, where market makers can turn offensive. On "bad news" and a gap lower, look for the stock to open near $39.88. This $39.88 level would also be a bearish traders short- term objective for any trades initiated at current levels ahead of earnings. At the same time, the upside potential short-term would be to the $47.08 level (50% retracement) should AMAT paint a more favorable outlook near-term.

Given these observations, a trader looking to play the stock for a trade might view risk/reward as 50/50. Whenever I feel that a stock might provide some type of market moving news near-term, but the stock trades 50/50, I begin to implement a straddle as the stock could make a drastic move (up or down). I like a straddle here in AMAT as the CEO has not given me any insight as to how earnings are shaping up, or given me guidance to the future. However, with the stock trading right at a key retracement level, the August 45 strike makes sense for the trader looking for a potential 7% move in the underlying stock in the next 24 hours.

Currently, the AMAT August 45 call (ANQHI) is offered $1, and the August 45 put (ANQTI) is offered $1.85. Outlay is $2.85 and the trader can now make a decision as to a straddle making sense for August expiration for Friday.

Disk Drive Index Daily Chart

The Disk Drive Index has spent the year trading between its January low and high. If we anchor a retracement to those points, we can see that the Disk Drive Index (DDX.X) is bouncing off the 61.8% level at 85. Today DDX is meeting some resistance at the 50-day moving average, but could bounce as high as 90 before meeting resistance at the 50% retracement level like it did in early July. 94.51 would be the next upside target.

Storage Technology - last nine months

I like the way shares of Storage Technology (NYSE:STK) have traded recently, and it sure looks to me like traders somewhere have been trading this stock off of recently tested retracement levels. I'd define the current trading retracement range of STK as $8.68 to $16.55. Today's break of downward trend can be taken bullish by traders, with a stop just under 38.2% retracement of $13.54. To monitor the stock hear on out, a trader gets very good correlation against the Disk Drive Index (DDX.X) for which STK is a component of. 50% retracement on the DDX.X is at $89.70 and I expect a correlated trade of $15 with STK. Hopefully a trader gets the feel of how to set up their trades with retracement. Once you've correlated a stock with its sector, it makes for much better conviction in your trading.

At some point, a stock will break out of a trading range. Often times however, in a sideways market like we've been in, a stock will stay range bound. This is where many subscribers have had problems. They will buy/short a stock, find that they have a 10- 15% gain in the trade and then watch that gain evaporate. Those traders are still trying to trade a system that "worked" back in 1999 and early 2000 when the market was trending higher, or a system that worked to the downside mid-2000 early this year when a very pronounced downward trend was apparent. The past couple of months, many stocks have been stuck in ranges. The ranges have actually been rather broad, but a trader using retracement and simply trading the levels like a market maker can actually profit from the moves.

A trader that "gets the feel" for a stock will actually make money on the "buy side" and then let the stock consolidate near a level they've identified as resistance and then short/put the breakdown from there on the very same stock.

Jeff Bailey
Senior Market Technician

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