Why Sell-Rated Lam Research (LRCX) Could Be Primed for a Comeback

A global supplier of innovative wafer fabrication equipment and services to the semiconductor industry, Lam Research (LRCX) plays an underappreciated but critical role for the broader technology ecosystem. While LRCX stock has fared better than many other innovators on a year-to-date basis, it has struggled over the past 52 weeks, down 18%. Making matters worse, its technical performance rates as a 64% Sell.Fortunately, there may be better times ahead.Over the last 10 weeks, the bulls and bears have been locked in a fierce competition, with the pessimists taking the edge by printing a “5-5” sequence: five weeks of upside interspersed with five weeks of downside, with an overall negative trajectory across the time period.What’s significant about this rather mundane pattern in any other security is the underlying sentiment. Whenever this sequence flashes, the following week’s long-side success ratio pops to 61.9%. Not only that, for the past one-year period, there were five 10-week sequences with a net negative trajectory, which is quite rare.Typically, bearish-dominant streaks (either in terms of down-week volume or net trajectory) see a relatively quick counterresponse by the bulls. That didn’t happen over the past year, raising the prospects of pent-up demand.Indeed, we’re seeing early evidence of a sentiment shift, with LRCX stock gaining over 5% in the trailing week and swinging up over 14% in the past month. Based on demand sequences, though, Lam Research could just be getting started.Assuming the positive pathway materializes (the one with the nearly 62% chance of occurring), LRCX stock could potentially be trading around $77 at the close of May 9. By the end of May, it’s possible, though hardly guaranteed, that the equity will land at about $79.47. These numbers stem from historical trends tied to LRCX’s responses to the aforementioned 5-5 sequence.Using the Market’s Current to Expertly Navigate LRCX StockWith the derivatives arena representing a market within a market, forecasting future prices is never a straightforward task. Because investors must contend with non-linearity and an open system, this framework means that random events can enter the paradigm and destroy a well-crafted thesis in a nanosecond.That’s the randomness of Wall Street that no one can escape. Fortunately, a Barchart Premier subscription can help even the odds.One key feature with which to familiarize yourself is Barchart’s Gamma Exposure screen. By the book, gamma exposure measures the change in delta exposure for options based on changes in the underlying price. The easier way to understand gamma is that it’s essentially the option market’s current — some setups will either accelerate or drag your trade as the underlying share price moves.As a quick summary, low gamma exposure represents a stable backdrop, with delta (or your position’s direction and speed) changing slowly. Movements are less amplified, with price action demonstrating a more natural cadence.On the other hand, high gamma exposure is the equivalent of strong currents. Here, small movements in the share price can cause big shifts in dealer hedging. This dynamic creates a feedback loop, forcing additional hedging behaviors that push prices toward a particular trajectory. If you happen to be on the right side of this feedback loop, your position can gain value rapidly.In the case of LRCX stock and specifically the options chain expiring May 30, gamma exposure varies across the strike prices. Up to the $75 strike price, the current is relatively calm. Between $75 and $80, though, gamma buildup is elevated. Should LRCX break into this range, the subsequent hedging behavior could potentially provide a major tailwind.Putting It All TogetherAs stated earlier, LRCX stock has been printing bearishly dominated trading sequences, which is unusual given its track record. I anticipate a relatively brisk rise to above the $79 level over the next four weeks. As such, I’m intrigued by the 76/79 bull call spread expiring May 30.This transaction involves buying the $76 call and simultaneously selling the $79 call, for a net debit paid of $139. Should LRCX stock rise through the short strike price of $79 at expiration, the maximum reward clocks in at $161, a payout of nearly 116%.Here’s where circumstances get intriguing. Up until $75, gamma exposure is relatively light. However, above this price point to $80, the stronger currents could force a feedback loop, thus accelerating LRCX stock. Given the high-probability nature of this trading setup, Lam Research should be on your watchlist throughout this month. On the date of publication, Josh Enomoto did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.