Traders afraid to chase the slew of overbought stocks and sectors in the wake of this week’s rally should take a good look at the technology sector. It’s barely budged over the past month, and provides many lower-risk entries. Drilling into the sector’s constituents reveals semiconductor stocks are leaders in the space and have momentum in their corner.
I was particularly impressed by Thursday’s rally. It marked a fast turnaround to Wednesday’s nasty bout of profit-taking and propelled many semis to new highs. That said, those that didn’t awake will soon follow their peers higher — particularly when money rotates back into the sector.
This is a pattern we’ve seen time and again in recent months. Lagging sectors never sit out for long. Inevitably, capital returns as traders ring the register on overheated areas and seek lower-risk, less overbought tickers to chase.
You can blindly throw darts and hit a bullish chart in semiconductors, but here are three of my favorites:
Now, let’s take a closer look at their price charts and how to trade them moving forward.
Semiconductor Stocks to Buy: Advanced Micro Devices (AMD)
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Advanced Micro Devices spent the past two weeks napping beneath its 20-day moving average. After a banner year in 2020, the hot chip stock deserved a rest. But with the 50-day moving average catching up fast and traders itching for AMD stock to reclaim its mojo of months’ past, we finally saw an upside breakout on Thursday. The rally was aided by a run back to tech stocks.
I think $100 is in the cards over the coming weeks. To capitalize, buy call vertical spreads. The cost is cheap and the potential reward quite high. Consider using the 50-day moving average near $88 as your stop point. Breaching it would reverse the daily uptrend.
The Trade: Buy the March $95/$100 bull call spread for around $2.00.
Applied Materials (AMAT)
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Applied Materials kicked off the year with a bang by breaking out of a key resistance zone at $90. Buyers swarmed, delivering big gains in the aftermath, and AMAT stock is working on its fifth up day in a row, as I type. Traders often say that once a stock clears $90, it’s going to $100. In my experience, it’s true more times than not — if for no other reason than a trend in motion stays in motion.
If you’re looking to swing trade AMAT, you missed the boat on the breakout. Best to wait for a pullback or at least a pause to digest the five-day gain. A retracement to $90 would be a gift I want to open.
Implied volatility is in the basement at the 10th percentile, so long calls or call spreads are the way to play.
The Trade: Buy the March $95/$100 bull call spread.
If you wait for AMAT to retreat, the price should be around $2.
Semiconductor Stocks to Buy: Nvidia (NVDA)
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Once upon a time, Nvidia was one of the hottest momentum stocks on the Street. Now it’s trading like a boring utility stock. But I suspect the volatility lull will be transitory. Sooner or later, buyers will return to carry on the longer-term uptrend. For that reason, Nvidia is the third and final of our semiconductor stocks to buy.
I’ll admit I thought January fourth’s rally would be the run that finally succeeded in lifting NVDA back to an uptrend. But it ultimately failed. Instead of guessing when the inevitable breakout will arrive, I prefer waiting for the market to tell me it’s arrived.
Set an alert at $550. That’s the ceiling that’s kept a lid on prices for two months. Until we take it out, the slumber continues. With implied volatility as low as it is, I prefer bull call spreads when (if?) the breakout arrives.
The Trade: Buy the March $570/$600 bull call spread
On the date of publication, Tyler Craig did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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