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Watch the Warning Signs in Advanced Micro Devices Stock

Nicolas Chahine

Advanced Micro Devices (NASDAQ:AMD) stock fell 3.5% on Thursday after a downgrade on Wall Street. While this is negative, it’s not a statement against the company outlook. Under the leadership of Lisa Su, AMD is positioned well to prosper into the next decade. However, short term, there are warning signs in the charts and the stock is precariously perched.

Watch the Warning Signs in Advanced Micro Devices Stock

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At the risk of sounding like a perma-bear, I want to side with the downgrade today but only from the price action perspective.

I have shared many bullish setups that yielded tremendous results many times before. So this is not a thesis to short AMD stock. But the charts today suggest that the easy upside potential in AMD is done. From here, it will be a tougher slog up. So it is best to hedge the bullish positions for long-term investors, or book some profits for the swing traders in it.

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Year to date, the AMD stock price is up over 100%, which is four times better than the S&P 500. This also comes after another similar out-performance last year. In two years, AMD is up 269%, which is 14 times better than the S&P. So clearly, the stock is a star on Wall Street, yet the analysts expectations are not lofty yet. So there shouldn’t be the likelihood of a deluge of downgrades.

Nevertheless, there is reason to be cautious at these altitudes. On the other hand, timing the moment it’s going to break down is also dangerous without a specific catalyst. Nvidia (NASDAQ:NVDA) went through the same thing last year before it finally fell from grace. Investors need to avoid getting caught in AMD stock if it suffers the same fate.

AMD Stock Is Not Bulletproof

Yes, this has happened to AMD in the past. It too fell into an abyss after a fantastic rally last year. The stock got cut in half before it double-bottomed at $16 per share. AMD failed from $34 per share. But now it’s 20% higher than that accident scene. So this solidifies it as a momentum stock, so it should be traded as such.

Those who want to own it for the super long term need not worry about these peaks and valleys. But it is important they remember that AMD stock is just now getting back to even with its levels from 2006. So it took 13 years for those who bought it in March 2006 to get their losses back to even. Meanwhile they had to sit through a 96% loss. And this wasn’t a fluke, it also happened after the dot com bubble. The swoon then was also a 93% loss and lasted about five years. Those peak investors are still far from recovering their investments.

AMD Is Doing the Right Things

I’m not arguing against investing in Advanced Micro Devices stock. The point today is that this is not an obvious bullish entry point. This is a company that is positioning itself to prosper in the future so it has the right potential. But from a trading perspective there could be much cheaper entry points into its stock. Buying all in after a massive rally and when the markets in general are near all-time highs is not ideal.

Fundamentally, AMD stock is not cheap. It trades at a massive price-to-earnings ratio and seven times sales. This dwarfs the valuation of NVDA, which itself is not cheap and definitely not cheaper than Intel (NASDAQ:INTC). And since AMD stock is clobbering the other two, its investors got what they paid for. It is easy to put it down for being too frothy, but so far management has been delivering on Wall Street’s expectations and that’s what sets the mood.

When to Trade Advanced Micro Devices Stock

The better entry point into Advanced Micro Devices stock would be on a more significant dip. There are minor pivot points just below current levels, but the significant one is at $34. This served as a major neckline for this most recent 25% rally, so it would make sense that investors would want to test it for footing before they can continue higher. The current rally could extend another $2 above the year high, especially as we are going into a bullish holiday week. But traders starting long here need special skills to trade this fast.

The bottom line is that when a stock rallies this fast, it becomes by definition a momentum trade. So unless the investors are savvy with the charts and the pivot levels, they are at a disadvantage and likely to make mistakes. So it is imperative to establish the lines that matter to lessen the odds of betting on upside in AMD stock too late in the rally. If not already long AMD, it is okay to admit that we missed it this time.

The best thing to do is to wait for a pull back to participate in the next leg higher.

Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. Join his live chat room for free here.

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