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Here’s How to Trade Advanced Micro Devices as it Bottoms

The growth stock fallout hasn’t been kind to Advanced Micro Devices (NASDAQ:AMD). Since peaking just shy of $100 during the second week of the year, AMD stock has given back 27% of its meteoric gains. Along the way, it shattered multiple support levels as well as the pivotal 200-day moving average.

Image of the Advanced Micro Devices (AMD) logo outside of a corporate building
Source: Sundry Photography / Shutterstock.com

But hope isn’t just on the horizon; it’s already here. Semiconductors have come roaring back in recent days as investors start to warm to growth areas.

And that bodes well for Advance Micro Devices. After chronicling the turnaround in semis, we’ll take a closer look at the trends and price levels worth watching in the AMD chart. So far, the stock has stuck the landing at a major floor and is giving us an easy zone to build bullish trades against.

The Chip Dip

I suggest using the VanEck Vectors Semiconductor ETF (NASDAQ:SMH) to analyze the semiconductor space. It counts the who’s who of the space among its top holdings and is the most actively traded of the few semiconductor-based funds available.

After topping in mid-February, the trend turned sideways, and we’ve been floundering ever since.

Last week, we were struggling to hold support at the lower end of the range. The 20-day moving average was also barreling down on prices, suggesting a support break could be imminent.

Semiconductor ETF (SMH) chart with recent break above 50 MA.
Source: The thinkorswim® platform from TD Ameritrade

But then, everything changed.

The importance of May 19’s high volume bullish engulfing candle can’t be overstated. We held the $224 support zone at the open and ripped higher throughout the day. Since then, prices have done nothing but push higher. And now, we’re north of the 20-day and 50-day moving averages. The risk of lower prices has been laid to rest for now, and the past of least resistance has shifted from down to up.

We will have to push above the $259 ceiling before signaling the end of the pause is officially here, but getting to the upper half of the range like we have is as good a start as any. Particularly given how nasty SMH was looking just last week.

Advanced Micro Devices is sympathetic to the broader chip industry, so what’s good for SMH is good for AMD.

AMD Stock Chart and Trade

Advanced Micro Devices (AMD) chart with support bounce.
Source: The thinkorswim® platform from TD Ameritrade

One perk to being a chart watcher is you can easily spot which price levels matter. And, when it comes to AMD, it’s all about $74. We’ve bounced off of it multiple times over the past six months. This makes it the logical zone to build trades around. Bears will point to the multi-month head and shoulders pattern as cause for concern. It’s definitely a formation that bears watching, but completing and confirming it would require AMD to fall below $74. And it hasn’t happened yet.

With growth stocks (including semiconductors) on the mend, I’m willing to bet that $74 continues to hold firm. If it doesn’t, though, we’ll simply stop out of today’s trade idea.

The options market provides many ways to capitalize on continued strength. Since AMD has yet to break above its 50-day moving average, I’m opting for a high probability cash-flow play over a directional one. In particular, bull put spreads look good.

The Trade: Sell the July $72.50/$67.50 bull put spread for 90 cents.

Consider it a bet that the price remains above $72.50. If it does, you’ll capture the max gain of $90 per spread. The max loss is $410, but you can reduce it drastically by exiting if AMD falls to $72.50.

On the date of publication, Tyler Craig did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

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Article printed from InvestorPlace Media, https://investorplace.com/2021/05/heres-how-to-trade-advanced-micro-devices-as-it-bottoms/.

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