I hate to be the one to say “I told you so” about Advanced Micro Devices, Inc. (NASDAQ:AMD), but, I told you so. That is, back in late August, I cautioned traders that AMD stock had been lifted by expectations that weren’t going to be met soon enough. Now a little more than two months later, the AMD stock price has fallen 12% from where it was when I raised the red flag, and Advanced Micro Devices shares are down 23% from their peak price.
Yikes.
I’m not bringing it up again to toot my own horn (well, not primarily anyway). I’m rekindling the matter mostly because there’s a lesson to be learned here, and because a bunch of you want to know if it’s safe to wade back into the stock after the meltdown.
Right on Cue
As a quick recap from my August take, I summed up the brewing headwind for story stock AMD by explaining, “…without a rock-solid fundamental foundation, eventually the ‘great future’ shtick gets old and investors lose interest in fanning the bullish flames.”
Sales were growing for the technology company, but profits weren’t. Perhaps more alarming than anything though, investors were losing interest in even talking about AMD stock. That’s generally what happens before the rug gets pulled out from underneath a stock, as it’s often a sign that the bulk of the unfounded optimism is about to unravel.
Stifel Nicolaus analyst Kevin Cassidy effectively remade the point immediately after the company’s mixed Q3 report was posted last week, and Morgan Stanley’s Joseph Moore underlined it earlier this week. That is, Cassidy commented a week ago that a “lack of gross margin expansion has us questioning how the customers are valuing these new products, or whether the market acceptance is slower than anticipated.” Meanwhile Moore opined, “We expect cryptocurrency to gradually fade from here, consoles to decline, graphics to be flattish,” all things, or stories, that were previously keeping AMD stock propped up.
In simpler terms, Advanced Micro Devices didn’t manage to live up to lofty expectations, as yours truly described as a major risk two months ago. As the old adage goes, “Expect it when you least expect it.”
Looking Ahead for AMD Stock
The 22% plunge in the AMD stock price understandably has some traders wondering if a bottom has been made and if it’s safe to wade into a position again.
Maybe, but not decidedly enough to justify the risk.
Two months ago, AMD shares were being broadly lifted by a rising support line (yellow) that extends all the way back to April of last year. Thanks to last week’s meltdown, that floor has been shattered. The stock’s also fallen under the August low around $12.00. That’s the bad news, as it says there’s not much on the near-term horizon that will keep things from getting worse. The stock is also below all of its key moving average lines.
On the flip side, the big plunge from October 25th also left behind a big gap, and the market generally doesn’t like to leave gaps unfilled. That’s the good news, in that shares are being beckoned higher.
The problem with assuming all gaps are eventually filled? They’re not all filled right away. Sometimes it can take weeks if not months to fill a gap, meaning there’s time and room for Advanced Micro Devices shares to lose even more ground before finding a firm footing.
With that said, the line in the sand most worth watching isn’t even in play yet. That’s the $9.90 area (green, dashed), where AMD made a bottom in May and more or less made one in January. That’s the stock’s best shot at finding a reversal-inducing floor, but it’s also the bears’ best shot at pushing AMD stock past the tipping point. The implosion over the course of the past week or so was just the appetizer. At the other end of the spectrum are the moving average lines around $13.00 and the long-term support line that’s just above that mark.
One More Thing for AMD Stock
The battle lines have been drawn, and the distance between the two fronts is pretty wide. Don’t confuse any action in the meantime as evidence of which direction shares are pointed now. We’re very likely to see a lot of back and forth in the meantime as the bulls and bears jockey and make their arguments. If you’re still in or still out, the smart-money move may just be to hold off on making a decision whether to buy or sell until the stock’s actually committed to one trend or the other. Anything in between just isn’t worth betting on.
And again, don’t forget the bigger lesson. Expectations are a two-edged sword for a story stock, for better or worse.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter.
