Semiconductor stocks were running hot on Tuesday as money came flooding back into the technology sector. Many players in the chip space offer compelling entry points because they’re not nearly as overbought as other areas.
In fact, two of today’s picks spent the past month going nowhere, even as the broader market was notching new high after new high.
Typically, the relative weakness would be negative, but in this case, I’m willing to overlook it. The consolidation has allowed these semiconductor stocks to digest gains and build a base to launch from. Besides, it was a well-deserved breather for a cohort that returned to its highs well before the broader market.
Here are three of my favorite semiconductor stocks to buy now.
Let’s take a closer look.
Semiconductor Stocks: Advanced Micro Devices (AMD)
After flirting with a breakdown below its 50-day moving average for eight days, AMD stock sprang to life Tuesday. A groundswell in volume propelled shares of the California-based chip company over 6.5% higher. The jump pushed AMD back above its 20-day moving average and places it a stone’s throw from the record high of $59.27.
In the past five months, we’ve seen a cup-and-handle formation develop. Tuesday’s surge is returning AMD to the upper end of the handle and is setting the stage for a longer-term breakout trade.
It’s now impossible not to be bullish. Sellers had their chance to force a support break, and they couldn’t do it. With the balance of power now shifting back to buyers, long trades are worth a shot. Here are two strategies to consider. The first offers a lower payout but a higher probability of profit. The second offers a higher payout but a lower probability of profit.
Trade One: Sell the July $50 puts for $1.20
Trade Two: Buy the July $55/$60 call vertical spread for $2.06.
Though the session gains in AMD were the real showstopper, Nvidia put up a solid showing of its own. It did close off the highs but still ended up 2.3% on the day. The volume pattern wasn’t as explosive as AMD, but big buyers could be waiting for a sustained break of the all-time high of $367.27 before swarming.
Before taking a pause this month, NVDA stock was a market leader with serious relative strength. Powerful momentum carried the stock into earnings, and every dip has been bought up quickly at the 20-day moving average. There have been multiple breakouts along the way, each delivering strong follow-through. I see no reason to treat this one any differently.
Implied volatility has dropped to its 19th percentile, reflecting a cheapening of option premiums. That makes buying call spreads a more attractive play than selling put spreads.
The Trade: Buy the July $370/$390 bull call spread for around $3.95.
KLA Corp (KLAC)
In sifting through the other semiconductor stocks, KLA Corp stood out among its peers primarily because of its recent surge. Last week scored a breakout over its old peak that quickly sent KLAC stock up 10% to a new record. All major moving averages are rising in support of the uptrend across each time frame.
The two-bar pullback that has since formed could be the beginning of a bull flag or consolidation pattern that will digest the gains and provide a lower-risk entry. Given the significance of $180 as a resistance zone, there’s a good chance it becomes support on a retest — if it even pulls back that far. With the Nasdaq Composite eclipsing 10,000 for the first time, it’s anyone’s guess as to when this virtuous cycle will exhaust itself.
Because of my belief in the $180 area turning into support, I like selling put spreads beneath that level.
The Trade: Sell the July $175/$170 bull put spread for around $1.10.
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