Advanced Micro Devices, Inc.: Bearish Pressures Mounting in AMD Stock

AMD StockAMD Stock: Correction or Consolidation?

What an incredible year Advanced Micro Devices, Inc. (NASDAQ:AMD) stock is having! AMD stock is up 142% year-to-date, and this strength has been broad-based within the sector, as the semiconductor index is one of the best-performing sectors in 2016.

I have been bullish on AMD stock, and only recently have I voiced my concerns with regards to this recent run.

I use technical analysis as the framework for my investment analysis. This basis of analysis is heavily reliant on price and volume data. Technical analysis assumes that this data can be used to discern trends and forecast future prices. I have become quite educated on this type of investment analysis, and I have been using it effectively to manage my investments for over a decade.

My concerns with regards to Advanced Micro Devices stock stem from the price action on its stock chart. I have reason to believe that the current run is losing steam.

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The following Advanced Micro Devices stock chart illustrates where my concerns began.

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Chart courtesy of StockCharts.com

Advanced Micro Devices stock has been trading within the confines of an uptrend line since shares bottomed in January 2016. This simple trend line is created by connecting the valleys on the price chart, and this trend line defines the bullish run of 2016.

When a trend line such as this is broken, it signals that, at minimum, the trend is slowing, and that the momentum that drove shares higher is waning. When indicators begin to fail, it is always wise to start stepping back and decreasing the size of a position, because the risk of a potential trend reversal is increasing. There is no worse feeling than letting a profit turn into a loss.

Advanced Micro Devices stock is now whipping through the uptrend line, and I can only assume that the trend line is slowly breaking. I would use the recent strength to lighten up.

The following Advanced Micro Devices stock chart adds to my concerns that a trend reversal may soon begin.

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Chart courtesy of StockCharts.com

In September 2016, AMD stock sold off and, in the process, a bearish moving average convergence/divergence (MACD) signal was generated. MACD is a simple and effective trend-following momentum indicator. Signal-line crossings are used to distinguish between bullish and bearish momentum.

In its current position, this indicator tells me, as a trader, that the bears are now fully in control of AMD stock and, as a result, the path of least resistance is toward lower prices. I have found it wise never to trade against this signal and, as result, I could not warrant holding a long position while the MACD is bearish.

The trend line labeled “Support” on the above chart represents the swing low in AMD stock that generated the bearish cross in September. This level is now support, and a drop below this level would confirm that a trend reversal is in play. A new downtrend will develop when a lower low is established.

AMD does not have to start trending lower from here because, in bull markets, stocks will trade sideways and set up their next bullish move when the signals are in bearish alignment. I have found it prudent to exit and await a bullish signal that would confirm that a trending phase has begun. This has reduced my risk of holding a position while it corrects.

The Bottom Line on Advanced Micro Devices Stock

I believe that the current trend higher in Advanced Micro Devices stock has run its course, and that a correction is now developing. I always find it prudent to step aside when such a circumstance develops and wait for a bullish setup before I reassume a position in AMD stock. The current macroeconomic backdrop adds further price pressure as an election and possible Federal Reserve rate hike loom.