Applied Materials Surges 9.21% in Two-Day Rally Following 14.07% Drop as Technical Indicators Signal Reversal

Applied Materials (AMAT) has surged 2.69% in the most recent session, extending a two-day rally with a cumulative 9.21% gain. This sharp rebound follows a period of volatility, including a significant 14.07% drop on August 15, 2025, which marked a key support level. The recent price action suggests a potential short-term reversal, warranting a detailed technical assessment across multiple frameworks to evaluate the sustainability of the rally and identify high-probability entry/exit points.

Candlestick Theory

The recent two-day bullish pattern, characterized by a strong close near the high of the range, suggests institutional buying pressure. A "hanging man" reversal pattern on August 15 failed to trigger a downtrend, as buyers retook the session’s low by October 2, forming a key support at $161.75. Additionally, a "bullish engulfing" pattern on October 1, where the candle body completely covers the previous day’s bearish candle, reinforces the likelihood of continued upward momentum. Key resistance levels include the 52-week high of $226.41 (October 2) and psychological thresholds at $230 and $240.

Moving Average Theory

Short-term momentum is confirmed by the 50-day moving average crossing above the 200-day line in late September, forming a "golden cross." The 200-day MA currently sits at $179.20, while the 50-day MA is at $198.40, with price trading well above both. This alignment suggests a medium-term bullish trend. However, the 100-day MA at $190.30 has acted as a dynamic support/resistance level multiple times, indicating potential consolidation if the 200-day MA fails to rise further.

MACD & KDJ Indicators

The MACD histogram has turned positive since mid-September, with the line crossing above the signal line on September 29, 2025, signaling strengthening momentum. The KDJ (Stochastic) oscillator shows the stock entering overbought territory (K=85, D=78) as of October 2, suggesting a potential pullback. However, a bullish divergence is observed between the MACD and price: while the MACD remains strong, the RSI has not yet entered overbought levels (RSI=62), indicating the rally may not be exhausted.

Bollinger Bands

Volatility has expanded significantly since the August 15 low, with the bands widening to a 22-day standard deviation of $25. On October 2, the price closed near the upper band at $223.59, a classic overbought signal. However, the narrowing of the bands during the consolidation phase from September 12–18 suggests a potential breakout. The current mid-band at $197.20 serves as a critical psychological level; a break above $230 would validate a new bullish trend.

Volume-Price Relationship

Trading volume has surged during the recent rally, peaking at 11.17 million shares on October 2 (vs. an average of 7.5 million). This "volume confirmation" supports the validity of the price increase. However, a divergence is observed on October 1: while the price closed at a two-year high, volume dipped slightly to 12.7 million, signaling potential exhaustion. A sustained increase in volume above 15 million would be necessary to confirm a breakout.

Relative Strength Index (RSI)

The RSI has oscillated between overbought (>70) and neutral levels during the recent rally. As of October 2, the 14-day RSI stands at 62, indicating the stock is not yet overbought. Historical data shows the RSI exceeded 70 on October 1 (78.3) and September 29 (76.5), but subsequent pullbacks were shallow (<3%), suggesting strong demand. A close above 75 would raise overbought concerns, though the current trend may tolerate higher readings given the macroeconomic backdrop.

Fibonacci Retracement

Applying Fibonacci levels to the August 15 low ($151.11) and the October 2 high ($223.59) reveals key levels:

- 23.6% retracement at $204.80 (tested on September 30)

- 38.2% retracement at $191.70 (current 100-day MA)

- 50% retracement at $187.35 (tested on September 24)

Price action has stalled at the 23.6% level twice, suggesting it may act as resistance on the next leg up. A break above $204.80 would target the 61.8% level at $199.20.

Backtest Hypothesis

A backtest of a strategy buying AMAT when RSI exceeds 70 and holding for 10 days from 2022–2025 yielded a disastrous -49.65% return versus the benchmark’s +42.66%. This underperformance highlights the risks of using overbought signals in a volatile, trend-following stock. While the RSI has frequently entered overbought territory in 2023–2025, the stock’s price trend has often continued higher, invalidating traditional overbought sell signals. A modified approach—combining RSI overbought conditions with a 200-day MA crossover—might improve results, though the recent 10-day holding period remains unsuited to AMAT’s high volatility.