Semiconductor stocks lit up the screen Thursday, and bulls everywhere should be rejoicing. These growth stocks have long been a mainstay among the momentum crowd, and their return to favor has bullish implications for market sentiment. I found three top industry picks to celebrate and capitalize on the newfound strength.
When a group of stocks delivers a single session of outsized gains, it’s worth asking if the jump is noise or noteworthy. I use two clues to differentiate between the two. If high volume accompanies the rally or if prices breach a crucial resistance level, then it’s notable. Otherwise, it could be random. In the case of today’s picks, we saw both developments legitimize the rally.
That makes me think more gains are in the offing for these three semiconductor stocks to buy now:
Semiconductor Stocks: Nvidia (NVDA)
On Thursday, Nvidia shares soared nearly 10% with over 87 million shares changing hands. It was the highest volume session since Jan. 24 and continued the trend reversal that started last week. It also marked the chip giant’s best session since last November. NVDA stock now sits above all major moving averages and has recovered much of this year’s loss.
Significantly, it’s outperformed other chip stocks this month and is a top ticker in the industry. Given the firepower behind its new uptrend, we have a real shot at returning to last year’s highs near $350. To properly position for it, I like buying call spreads. You can expand or contract the spread width to get your desired cost. Here’s an excellent place to start:
The Trade: Buy the May $300/$320 bull call spread for $6.30.
You’re risking $6.30 to make $13.70 if NVDA climbs to $320 by expiration.
Advanced Micro Devices (AMD)
If you’re like me, you looked at the NVDA stock chart and came away wishing you bought when it first broke the 50-day moving average. While you missed the initial burst on that one, you can still catch it for Advanced Micro Devices. AMD looks just like Nvidia did a week ago. It’s been cruising below the 50-day moving average for three months but finally found significant support at $100. Tack on the series of lower-pivot highs, and we officially have a descending triangle pattern.
With Thursday’s 5.8% pop, we officially breached the upper trendline and the 50-day. If that weren’t enough, we’ve seen nearly half a dozen accumulation days develop over the past two weeks to confirm institutions are wading in again.
If there’s one thing history has taught us about AMD, it’s that you don’t bet against breakouts. They have a strong track record of delivering big profits to buyers. Consider $130 the next target.
The Trade: Buy the May $120/$130 bull call spread for $4.
You’re risking $4 to make $6 if AMD rises beyond $130 over the next 56 days.
Semiconductor Stocks: Broadcom (AVGO)
Broadcom offers a delightful breakout opportunity if you can get past the rich price tag. That makes it the third submission for today’s trio of semiconductor stocks. The January swoon delivered a quick kick to the stock, but ever since we found support at the 200-day moving average, prices have been climbing steadily to form an ascending triangle pattern.
Two weeks ago, prices finally eclipsed the 20-day and 50-day moving averages, placing AVGO within striking distance of a breakout and resumption of its long-term uptrend. The weeks of chop made shareholders and spectators exercise patience, but the long-awaited day has finally arrived.
Thursday’s 4.5% pop carried prices past the $610 ceiling and set the stage for a run back to the December highs of $677. That leaves about $50 of upside from here, which is plenty to make a trade work.
Let’s keep things consistent and go with another call spread idea.
The Trade: Buy the May $630/$660 bull call spread for $13.
You’re risking $13 to make $17 if AVGO climbs past $660 by expiration.
On the date of publication, Tyler Craig was LONG AMD. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
