Unless you have been hiding on a remote island for the past few weeks (if you did I hope you enjoyed your vacation), you have likely noticed the absolute and relative under-performance of large-capitalization tech stocks in October. After showing major relative out-performance into September, stocks like Advanced Micro Devices (NASDAQ:AMD) in October moved into sharp mean-reversion (lower) mode. AMD stock as a result has now finally reached levels where better reward to risk buying opportunities are found.
The concept of “mean-reversion” in the stock market is a powerful one and unfortunately not one that is being paid sufficient attention to by the majority of traders and investors. In other words, although stocks and other assets always move up and down, sometimes moves in one direction or another become so excessive that buyers (in the case of a bull run) eventually get exhausted or sellers (in the case of a sell-off) eventually become tired. It is at those junctures of either maximum bullishness (greed) or maximum bearishness (fear) that stocks often make sharp mean-reversion moves.
To wit, shares of Advanced Micro Devices from this past July into the September highs rallied around 115% and left the charts in vertical overshooting mode.
AMD Stock Charts
Moving averages legend: red – 200 week, blue – 100 week, yellow – 50 week
On the multiyear weekly chart we see that in July AMD forcefully broke out past a well-defined horizontal resistance area around the $15-$16 range as marked by the blue box. Some bullish headlines quickly got the chart-chasing trading community excited and the toppled over each other to snap up shares. Eventually however the last of the ‘bulls’ had bought and with no sellers left the stock was left for gravity to run its course.
As of today (happy Halloween), AMD stock has corrected approximately 50% from its September highs, once again decapitating any chart chasers who felt the need to buy a vertical chart in greed mode.
This corrective move lower, however, now has AMD stock back at that aforementioned $15-$16 area that formerly acted as resistance and thus now could become support for a bounce higher in the stock.
Moving averages legend: red – 200 day, blue – 100 day, yellow – 50 day
On the daily chart, we see that AMD stock now has not only reached horizontal support in the blue box area but that this area also coincides with its red 200-day simple moving average.
Furthermore and from a momentum perspective as measured by the MACD momentum oscillator at the bottom of the chart, we see that the stock is now very oversold. None of this has to mean that the stock can’t fall somewhat further more here but in my eye the odds of a continued slide at this rate are slim.
Active investors and traders could thus look to buy some AMD stock around the $15-$16 range with a next upside target at $20 while any strong bearish reversal from here is a stop loss.
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