Traders hit the pause button on Advanced Micro Devices (NASDAQ:AMD) stock Monday. The rest is well-deserved after July’s jaw-dropping 47% gain, and hopefully marks the start of a correction that will create more attractive entries. Heaven knows we need one after such a red-hot run. Chasing AMD stock here is ill-advised unless you’re using one of my preferred tactics below.
The ongoing battle for supremacy in the semiconductor space reached a critical turning point in this earnings season. Intel (NASDAQ:INTC) declared itself unfit for leadership and relinquished the throne to Advanced Micro Devices. And you don’t even have to know all of the details surrounding each company’s sales, products, or fundamental differences. There’s no need to sift through the minutia of each company’s just-released quarterly reports. The judgment of the masses, as viewed through price charts, is evidence enough.
To wit: while AMD rose nearly 50% last month, Intel fell 20%. The divergence between the two couldn’t be more dramatic.
What Does the AMD Stock Chart Say?
The message being broadcast by AMD is bullish by any translation. But — and here’s the key point for today’s technical take — it’s extremely overbought. Consider first, the weekly time frame. This is not the first vertical ascent we’ve seen. During both the fourth quarter of 2019 and the third quarter of 2018, AMD rose on a rope. But both overbought episodes ultimately gave way to a sharp drop, punishing those that got too greedy near the top.
To be clear, I don’t think we’ll see anything as severe as those prior two instances. But even if we pulled back half as much, it could be quite painful if you’re piling into a full position here. At a minimum, I’d prefer to see the stock correct through time or price for the next week or two. That would at least allow the 20-day moving average, which has been left in the dust, to play catch-up.
It’s interesting that the post-climax selloffs of 2018 and 2019 both found support in the area of the previous breakout areas. A similar flight path would see us re-test $60 at some point in the coming months. Given the strength behind tech stocks right now, I’m skeptical, but it’s worth keeping in mind that if we did drop that far, you better believe there will be some serious buying interest.
The past two candles look sluggish to me and provide further reason for patience. At the time of this writing (Monday, 11 a.m. EDT), AMD had given back this morning’s gains and now sits in the red. This is happening, mind you, while the NASDAQ was pushing to new highs, up 1.5%.
Two Smart Trades
If you’re a stock investor and can’t help but buy AMD stock, given its newfound industry dominance, then do yourself a favor and at least scale-in. That is, only buy a partial position now. That way, if AMD retreats from here (which I think is highly likely), you can buy more shares at a lower price. And if it doesn’t drop at all, well, at least you own some shares.
For options traders, I also suggest waiting for a better entry point. But if you’re anxious and want in sooner rather than later, I much prefer cash flow plays like naked puts or bull puts that will profit from time decay if AMD trades sideways for a while to digest its gains. Plus, you’ll have a wider profit range than from more directional trades, so if the stock pulls back a bit, you can still carve out a profit.
The Trade: Sell the Sept. $65/$60 bull put for around 70 cents.
If you wait for a few down days, you will get a higher credit.
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