It’s been a tough start to the new year for Advanced Micro Devices (NASDAQ:AMD). Not that it’s entirely alone. Still, could that weakness also spell an opportunity tomorrow for today’s investors? Let’s take a look at what’s happening both off and on the AMD stock price chart, then offer a risk-adjusted determination aligned with those findings.
GameStop (NYSE:GME). It’s all anyone can talk about these days. But it’s still but a sideshow. The main event, aside from novel coronavirus mutations and vaccine rollouts from Moderna (NASDAQ:MRNA) and Pfizer (NYSE:PFE) or the new Biden administration’s next executive order, is earnings season. And unfortunately, AMD hasn’t proven immune to the often-challenging impact of quarterly reports.
Shares of Advanced Micro Devices are off by about 6.5% in 2021. That compares unfavorably to the large-cap S&P 500, which as of Friday night’s closing bell has given back 1% on the year. And compared to a gain of 1.45% in the tech-heavy Nasdaq Composite, the result is even more discouraging.
So, are investors right to blame AMD stock’s relative and absolute price weakness on earnings? Well, kind sorta.
This past Tuesday evening the chipmaker actually released all-around, standout quarterly results. In summary, AMD topped street profit views by 5 cents on earnings of 52 cents per share for it fourth quarter. Likewise, sales of $3.24 billion compared favorably to estimates of $3.02 billion. Growth was also compelling. Profits surged surged 63% from the year-ago period while revenue climbed smartly by 53%. Moreover, AMD isn’t about admiring what’s in the rearview mirror either.
Looking ahead management is forecasting sales of $3.2 billion for Q1. That’s up 79% from 2020’s first-quarter. It also smashed Wall Street’s consensus estimate of $2.73 billion. And for the full-year AMD expects to take in revenue of $13.38 billion and easily topping analysts $12.24 billion. Behind the enviable growth and what stands to be another impressive year following 2020’s record-breaking performance, CEO Lisa Su said the company’s outlook highlights the strength of its chip portfolio within a robust market for high-performance computing.
AMD Stock Daily Price Chart
Source: Charts by TradingView
Too much success for its own good? With AMD stock losing 6.20% in the immediate aftermath of Tuesday night’s top-notch results the pressure on shares can be chalked up to profit-taking, as well as a sell-the-news reaction. The fact is Advanced Micro Devices did gain 89% in 2020. Expectations were also high. Shares were up more than 3% for the year in front of earnings release and narrowly off their all-time-highs.
Today and on the price chart, some ominous damage has entered the picture. The illustrated daily chart reveals that since mid-December AMD shares have transitioned from a bullish “high-handle” layered on top constructive and bullish “W” base into a bearish head-and-shoulders.
After forming an earnings-driven right shoulder and a bit of follow-through to the downside, the stock is now precariously perched on the head-and-shoulders pattern’s neckline. Classically, the technical imagery looks bearish. However, AMD does have a couple factors working in its favor in conjunction with its fundamental picture.
First, AMD stock is the kind of tech large-cap which can be considered a core portfolio holding. And for this caliber of stock, buying on weakness generally produces outsized and above-market returns over time. Corrections are inevitable, but the best stocks eventually yield even stronger gains.
Second, pattern failures, both bullish and bearish, can provide solid entry points. Today, as AMD toils with a possible breakdown beneath the neckline, a failure to crack support or a bearish signal that quickly reverses higher, could lead to bears throwing in the towel. That could result in price reaction which then puts shares through the high of the right shoulder. The head could then follow suit and ultimately a meaningful rally to new highs could unfold. That’s great, right?
Course of Action
First things first. I don’t recommend just blindly buying weakness, no matter our expectations, unless it’s the over-the-top variety. Right now, that’s not the case in Advanced Micro.
For investors interested buying shares, I’d suggest monitoring the price action as it challenges the neckline. Should AMD stock begin to show signs of a bearish failure coupled with a bullish confirmation from stochastics, a purchase and one preferably complemented by a stock collar would look extremely attractive.
On the date of publication, Chris Tyler holds, directly or indirectly, positions in Advanced Micro Devices (AMD) and their derivatives but no other securities mentioned in this article.
Chris Tyler is a former floor-based, derivatives market maker on the American and Pacific exchanges. The information offered is based on his professional experience but strictly intended for educational purposes only. Any use of this information is 100% the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.