This week has proved pivotal for the nascent recovery in stock land. Shots have been fired and buyers are cowering in their hidey-hole. Even market-leading stocks like Advanced Micro Devices (NASDAQ:AMD) are falling prey to the selling pressure. Let’s take an updated look at the troubling signs and suggest how to trade AMD stock right now.
When analyzing tech stocks, I usually use the Nasdaq chart as my guide for the bigger picture. Still, I think it’s important to understand the deterioration we’re seeing elsewhere like in the S&P 500. There’s a strong link between the Nasdaq and the S&P 500, so weakness in one eventually spills into the other.
“M” for Murder
With this week’s whack, we now have a double top formation signaling warning signs in the S&P 500. The pattern looks like an “M” and is said to represent murder because it kills uptrends. A breach of the prior pivot low at $279 will complete and confirm the setup. The market is already trading below support pre-market so you can consider this a fully formed signal.
The increased volume over the past two sessions is particularly troublesome because it suggests institutions have become aggressive sellers. Wednesday’s participation marked the highest volume seen on a down day in the SPDR S&P 500 ETF (NYSEARCA:SPY) since the trend turned higher six weeks ago.
It is against this backdrop that we need to consider AMD stock.
Semiconductors Like AMD Stock Slipping
A quick analysis of the Semiconductor ETF (NYSEARCA:SMH) reveals the bears have also infiltrated tech. It’s a recent development, to be sure. The damage only cropped up over the past two days, but it’s arrested the uptrend in SMH.
The weakening fund shares the double top pattern seen on the S&P 500 and is reaffirming the importance of the $138.50 resistance zone. Until we power above it, SMH is flashing a yellow light for new bull trades in chip stocks.
While I don’t anticipate as strong of a rollover as what we see in small-caps and other under-performing areas, we still have to pull in the horns on AMD and crew until this selling fit works itself out.
AMD Stock Charts
Advanced Micro Devices shares still have a healthy weekly trend. This week’s mild drop has yet to grow into a large enough drawdown to vex the bigger picture. And it may not. I like using March’s decline as a template. It ultimately proved a buying opportunity at the rising 50-week moving average. If we fall that far again, I’d view it as yet another chance to buy the dip.
That said, there’s a lot of room to fall if bears press their advantage in the short run. For a more detailed view of that, we’ll need to use the daily chart.
Up until Tuesday, AMD stock was flying just fine. Monday’s rally jammed the shares back above the 20-day moving average and an attack on the highs looked imminent. Unfortunately, yesterday’s slide ended the ramp prematurely, and we now have a lower swing high to contend with. $49 is the level to key in on. It marks the 50-day moving average as well as an old resistance and support zone. Breaching it will turn me short-term bearish.
A Strangle Trade
The low price tag and higher implied volatility have made AMD one of the top stocks for selling options for years now. I’m normally fond of naked puts due to its powerful long-term uptrend, but the recent bearish shift would give me pause for selling puts outright.
To respect the weakness, I like selling strangles instead. It creates more of a neutral position that profits from time decay as long as the stock doesn’t rise or fall too far in the coming month.
The Trade: Sell the June $40 put and $62.50 call for around $1.21.
Your max reward is $1.21 and will be captured if AMD sits between $40 and $62.50 at expiration. To increase your odds of success, exit the trade early when you can buy back the call or put around 10 to 15 cents.
For a free trial to the best trading community on the planet and Tyler’s current home, click here! As of this writing, Tyler held short AMD puts.
