Novellus: Looking for Clues in NVLS Chart

By Bryan McCormick

Novellus is no longer a heavyweight index component, but earnings results and guidance from the company after the market closes today will color other semiconductor equipment makers such as Applied Materials and Lam Research.

As such, it is interesting to note some interesting action on the NVLS chart, which may become increasingly familiar as we head into earning season. The stock has moved in a pretty tight range between $16 and $19 for the last quarter, and the shares have been marking time leading up into the earnings event tonight.

This is not an unusual pattern in cases where traders are not sure of how well the company may do on its next report. Keeping the shares within a range is in some respects a sign of uncertainty, with traders unwilling to push the stock too far in one direction or another until the company provides clarity.

The important thing about trading ranges is what happens when they get broken. If Novellus reports news or guidance that is better than expected, we might well see the stock break above that $19 area shown by the red horizontal line.

Range breaks, when they occur, tend to persist in the same direction for some time and can exhibit very large price moves. That might equally be the case on the downside if the news is disastrous and the $16 level is broken.

There are a fair number of shorts active in the name, with 5.9 percent of the float short according to the last data I have available. If there is positive news, the subsequent covering could provide additional upside fuel.

On worse news, however, it would not be unusual for the shares to fall to the low of the range. Whether there would be a break -- in which case the downside could get crowded -- depends on just how bad the news is.

The bounds of the range gives us some idea of where risks are in both directions and allows us to think about how we will act if the stock breaks either way.

(Chart data provided by Thomson Reuters)