There is one stock that consistently stands head-and-shoulders above all other — Advanced Micro Devices (NASDAQ:AMD). For the last two years, AMD stock was the best performer in the S&P 500. Earning that title once is impressive enough. Doing it twice back-to-back is unparalleled. Case in point, AMD rallied 14% in two days after Tuesday’s 8% pop. It is up 50% from the correction low, and it is only about 8% from the all-time high. This is mind-boggling since the CBOE Volatility Index (VIX) is still near 40.
Other chip stocks have also had good days, like Nvidia (NASDAQ:NVDA) and Intel (NASDAQ:INTC). But AMD has been the more consistent of the bunch.
This is mostly thanks to the faith that Wall Street has in CEO Lisa Su. And therein lies some risk, because if she leaves then the stock would be exposed to tremendous downside. To most experts, she is the only reason why the company made this incredible turnaround from almost-failed competitor to dominant player. She may mean more to AMD stock than did Steve Jobs to Apple (NASDAQ:AAPL).
AMD Stock Has a Bright Future
The fundamentals are simple. It is one of three major companies who build the brains of the tech that will power the world for decades. The wave of digitization is not a fad, it is a trend that is accelerating at an exponential rate. Barriers to entry are very high, so these three incumbents will hold a competitive advantage for a long time. And among them, I would bet on the best to continue leading the pack.
This is not the same as saying buy an all-in position right here. It is not in my nature to chase, and AMD stock at these levels is not an obvious point for entry. Yes, it could still go higher, but I would prefer to wait for a dip to initiate new positions.
The time to start was late March, when it was dropping hard. That was one falling knife worthy of catching, and I wrote about it ahead of time. The best trade was to sell puts into the fears, because the VIX was so high that the premiums were also high. Those options trades yielded immediate profits and are now off the table.
Study The Charts For Clues of What Levels Matter
The easy bounce profits have played out. It is human nature to err in panic on big red days, but it’s also possible to limit that by knowing the important levels.
In February as AMD stock was falling fast, I cautioned against panicking out of it. In fact, I specifically referenced the opportunity to buy the dip near $40 or even $36 per share. Those were the two bottoms on March second and March 18th correction. Armed with the knowledge traders would have acted near perfectly.
This leaves us with the question — what level should investors look for now?
Unfortunately there isn’t one right answer to fit all portfolios. Ultimately, this depends on individual time frames and risk tolerances, because people are different and they have different time tables.
Over the long term, I am confident that if the stock market is higher then AMD is leading the pack. Trying to find the perfect entry point for that is futile. A few dollars above or below current price won’t matter much for investors who intend to hold the shares for eons.
For the shorter term, there are clues in the charts that can help avoid obvious mistake. AMD stock triggered a bullish pattern once it crossed over $50 per share. It is still in the process of playing this out. The Tuesday pop brought it into a prior resistance level from the failure of late February candles. Consequently, the better opportunity is to wait for the bulls to retest the neckline from which they just broke out. This means that it’s smarter to buy AMD closer to $50 than $60 per share.
Ideally I like AMD closer to $45 but the odds of that scenario are low since the bulls remain too strong. Nevertheless those who want to start off a trade on a good note should wait out a few candles, at least until is sees a red day.
It is Important to Know the Nature of the AMD stock
Not all stocks trade the same — these are momentum stocks and they are difficult to trade. They run really fast in both directions and leave very few obvious entry points.
For some reason most find it easier to chase AMD stock near all-time highs even though it’s most often the wrong thing to do. Nevertheless, I can’t fault anybody for wanting to own it today even at these levels. The momentum trader motto is to buy-high-and-sell-higher and for AMD stock this has been a viable strategy.
To restate the obvious, it is very important for investors to know what suits their personalities and portfolios. It’s easy to get caught up in somebody else’s thesis, and that’s when mistakes happen.
But to summarize and leave no confusion about my opinion, AMD stock is a buy on any major dip.
Nicolas Chahine is the managing director of SellSpreads.com. Join his live chat room for free here. As of this writing, he did not hold a position in any of the aforementioned securities.
