AMD Stock: Setting Up to Move
The incredible year for Advanced Micro Devices, Inc. (NASDAQ:AMD) stock continues. I was concerned about the market developments, and under such conditions, I have found it prudent to step aside and wait for a bullish setup before re-entering a market position. This is the reason why I stepped back from my bullish view on AMD stock.
I am updating my view because quite a bit of my concerns have been alleviated. My concerns were centered around the presidential election, and how the market would react to whomever won. This event has passed, and even though many believed the market would crash on a Donald Trump presidency, the exact opposite is what occurred; the markets soared. There is still the Fed meeting looming in December, but it is almost a given that the Federal Reserve will raise interest rates at that meeting.
Now that many of my concerns have subsided, it is time to re-examine AMD stock.
The following chart illustrates the pattern that initially suggested a bull market in Advanced Micro Devices stock.
Chart courtesy of StockCharts.com
The downtrend line, highlighted in blue, is created by connecting the peaks. This downtrend is defined by lower lows and lower highs. It can easily be identified as the price moves from the upper left to the lower right. This is a clear example of bearish price action. This trend has ruled trade in AMD stock for approximately one decade.
In April 2016, Advanced Micro Devices stock rose above the downtrend line and changed this bearish landscape, signaling an end to the infamous bear market.
After the break of the downtrend, AMD stock proceeded to run for the next four months and totaled six months of gains, before AMD stock finally registered a month void of positive gains. This was an impressive run, and it registered as the longest run of month-over-month gains in over a decade.
This rally was fueled by investor optimism surrounding the sector, as well as by short-covering. Breaking a trend that was intact for a decade is not an easy feat, and investors responded appropriately.
AMD is up 171% year-to-date but that might not be last of it. I added a horizontal support line to the downtrend line, and a new pattern emerges. This pattern is an enormous descending triangle.
I am questioning this pattern because of the price objective that is assumed by this pattern. A bullish breakout of this descending triangle would assume a potential price objective of $42.00, the highest price at which that pattern began to develop. Perhaps this price will serve as a long-term objective.
The following price chart illustrates the current setup that will dictate the next direction in AMD stock.
Chart courtesy of StockCharts.com
My focus on the chart above is the two trend lines labeled “Support” and “Resistance.” These levels have created a tight trading range and the next move that will develop in AMD stock is dependent on what the price does around these levels. A break above resistance would mean that the bull market has resumed, and a break below support would indicate that a deeper correction is developing.
The run-up into this trading range is referred to by traders as an impulse wave. The theory behind these waves is that they will be followed up by a consolidation wave, in this case a trading range, that will give way to another impulse wave. Impulse waves have a habit of mirroring each other, and similarly to Newton’s third law, a resolution of this trading range is that I can expect a reaction that is equal or opposite to the initial impulse wave.
Price is currently testing resistance, so a break above this trend line is likely. An equal reaction would mean that a new impulse wave would develop that could take AMD stock to a potential price objective of $11.84.
The MACD signal is still bearish. MACD is a simple and effective trend-following momentum indicator. Signal-line crossings are used to distinguish between bullish and bearish momentum. If price were to breakout, a bullish cross would develop and this would signal that the bulls are once again in control of Advanced Micro Devices stock.
Bottom Line on AMD Stock
I am neutral on AMD stock and am waiting for an outcome of the trading range that has developed. A break above $8.00 would be a tremendous win for the bulls and would swing my bias to bullish on Advanced Micro Devices Stock.