Breakout Or Fake-Out For AMAT?

01/03/05 02:00:48 PM

by Arthur Hill

Applied Materials appeared to break double-bottom resistance, but failed to hold gains. Is this a breakout or just a fake-out?

Security: AMAT
Position: Buy

Failed double bottoms are common in a downtrend. A security forms a reaction low, bounces, and then moves back toward that reaction low. As the two lows meet, the bulls start calling for a double bottom. This is indeed the early stages of a double bottom, but a break above the intermittent high is required for confirmation. Without confirmation, this potential double bottom is merely a consolidation within the downtrend.

Applied Materials (AMAT) formed a potential double bottom in May and June. There were two lows around 18 and an intermittent high at 20. The stock failed to break above resistance at 20 and this potential double bottom simply marked a consolidation within the ongoing downtrend.

Figure 1: Applied Materials. AMAT formed a potential double bottom in May and June. Breakout or fake-out?

Graphic provided by: MetaStock.

Graphic provided by: Reuters Data.

AMAT is once again tempting the bulls with a double bottom. The stock formed two lows around 15.5 with an intermittent high at 17.79. A break above 17.79 would confirm the pattern and argue for further strength. The stock did indeed break above 18, but failed to hold and moved back to around 17. Does this constitute a breakout and confirmation?

Technically, the stock did move above the prior high and even closed above 17.79 for two days. This shows strength, but the immediate pullback is cause for concern. However, this pullback could be a simple correction. The decline to 16.5 retraced 62% of the prior advance (15.49 to 18.33) and found support from broken resistance. This is normal for a correction and a strong stock should hold 16.5.

As long as 16.5 holds, the breakout merits attention and further strength above 18 (again) would open the door to the low 20s. A failure to hold 16.5 would make this another failed double bottom and increase the chances of a move below 15.

Arthur Hill

Arthur Hill is currently editor of TDTrader.com, a website specializing in trading strategies, sector/industry specific breadth stats and overall technical analysis. He passed the Society of Technical Analysts (STA London) diploma exam with distinction is a Certified Financial Technician (CFTe). Prior to TD Trader, he was the Chief Technical Analyst for Stockcharts.com and the main contributor to the ChartSchool.

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