Is This Sell-Off in Advanced Micro Devices Stock a Buying Opportunity?

AMD Stock
Credit:iStock.com/Anil Bolukbas

AMD Stock: Eyeing Key Technical Indicators

Advanced Micro Devices, Inc. (NASDAQ: AMD) reported earnings after the close of trade on October 24, and it beat on both the top and bottom lines, which seems like a reason for celebration. It should have translated into higher AMD stock prices but that is not exactly how it went down.

Instead, Advanced Micro Devices stock sold off following its earnings announcement and is currently down by 10.68%. My understanding and the reason why the stock sold off is that there are some concerns with earnings, specifically having to do with a resolution involving patent disputes. The exact details with regards to the resolution have not been disclosed but the settlement was included in this quarter’s earnings, which is making investors and analysts question whether or not this quarter was as good as the headline numbers stated, and perhaps they might have missed without the settlement.

Questions and doubts breed contempt, and as a result, AMD is down sharply.  This sell-off may have created a buying opportunity, so let me explain.

I have been following and writing about Advanced Micro Devices stock for quite some time, and this year, I have identified a key technical indicator that has been acting like a very important and influential level of price support. I have stated numerous times that as long as AMD stock is trading north of this indicator, I will have reason to believe that a bull market is still in development.

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The opportunity I speak of is directly related to this indicator, and the selling pressure caused by the disappointing earnings report has translated into another test of this important level of price support.

The following Advanced Micro Devices stock chart illustrates the technical indicator that supported this investment for much of this year.

amd stock chart

Chart courtesy of StockCharts.com

This stock chart illustrates the importance and the significance of the 200-day moving average.

The 200-day moving average is a trend line that is created by averaging the stock’s closing prices over the last 200 days and plotting that value on the price chart. This produces a smoothed version of the predominant trend.

The 200-day moving average that is painted on the AMD stock has a positive slope indicating that the predominant trend is bullish. The 200-day moving average also acts as a dividing line that separates bullish investments from bearish ones. Using this trend line to distinguish between these two polar opposites is quite easy, in fact. If an investment is trading above the 200-day moving average, it is in a bullish state, and if it is trading below it, it means it is in a bearish state.

AMD broke above the 200-day moving average in February 2016, when it crossed $2.15. This feat implied that the investment was in a bullish state, and it appropriately staged a bullish advance towards higher stock prices. The move has been quite impressive, capturing a gain of 492.09% in under two years, proving the merits of trading above the 200-day moving average.

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This current sell-off following earnings has landed right on top of this infamous moving average, and as long as this stock is trading above it, I can only assume that the bull market that began in February 2016 is still intact. This is why it is imperative that AMD stock find a foothold at this level, because one of the pillars that created this bull market is predicated on it.

The other pillar that helped create this bull market has been constructive in nature, and it is illustrated on the following Advanced Micro Devices stock chart.

Advanced Micro Devices stock chart

Chart courtesy of StockCharts.com

This AMD stock chart has been annotated in order to highlight the constructive price action that was responsive in creating and sustaining move towards higher stock prices.

Constructive price action consists of impulse waves and consolidation waves, which work in an alternating wave structure.

The impulse wave defines the stage in a bull market when the stock price stages a move towards higher stock prices, while the consolidation wave defines the stage in a bull market where the stock price refrains from advancing in order to create the necessary conditions so a new impulse wave can develop.

AMD stock is currently within the confines of a consolidation wave, and support outlined by this wave coincides with the 200-day moving average. In order to suggest that higher stock prices are on the horizon, Advanced Micro Devices stock needs to exit the consolidation wave in an upward direction by closing above $15.75. Until then, this investment will refrain from staging a bullish advance.

Analyst Take: 

Advanced Micro Devices stock is testing its 200-day moving average following a disappointing earnings report. This level has supported this investment for much of this year, and in order to maintain its bullish stature, AMD stock will need to find a foothold at this level. If I were inclined to invest in this company, I would wait for a confirmed close above $15.75 before assuming a position because it would indicate that higher prices are in development.