Sunday Edition: When AMD’s Chart Was A Crystal Ball

May 7, 2017

Sunday Edition: When AMD’s Chart Was A Crystal Ball

A few weeks ago I wrote an article for our sister publication Direction Alerts about a technical pattern I had spotted on semiconductor company AMD.

What I had found at the time was a head and shoulders formation that I determined would see the stock price falling and giving investors an opportunity to buy this growth stock at a discount.

Here’s an excerpt from the article:

Source: TradingView.

“In the chart above, I’ve marked the head and shoulders formation on AMD’s daily chart.

“…To identify a head and shoulders formation, look for the price to rise to a trough (shoulder) and then fall, then rising above the first trough to form the head before falling again, and then the price rising again to form the second shoulder. 

“Once the second shoulder forms, the neckline can be drawn connecting the two lows between the head and the shoulders as shown above. In AMD’s case, the neckline points to the $12.50 level. 

“To get the price target for the correction, measure the distance between the top of the head and the neckline and then add that number to the price below the neckline. In this case, the downside target is roughly $10. 

“After the price hits the $12.50 and $10 levels, I expect that it will begin a new uptrend, and this head and shoulders pattern then represents a potential opportunity to jump in on AMD.”

This was written at the beginning of April.

This past week AMD had its Q1 2017 earnings report and subsequently lost $3 billion of its market cap, and its stock price now sits at just above $10.

What’s funny is that AMD’s Q1 results were largely in line with analysts’ estimates, however the company is also known for routinely beating analysts’ estimates and thus those estimates were already priced-in to the stock.

So what happened? Q1’s results being merely in line with estimates wasn’t really what caused the sell-off. What investors took issue with was the chip maker’s gross margin outlook of 33%, down from 34% in the last quarter.

Investors’ response to the news is what could be called irrational, but it certainly does give those who were already planning to buy AMD a good opportunity to buy at a better price.

But what this story with AMD really confirmed for me was how helpful technical analysis can be when making a decision about an investment.

In my mind, the best approach to investing isn’t to take a purely fundamental or purely technical approach to looking at stocks, but rather to employ both because while fundamental analysis can tell you if you’re buying a good business, technical analysis can tell you if you’re buying that good business at a good time.

As I discussed in my previous article about AMD, fundamentally speaking, the company is expensive compared to its competitors Intel and Nvidia. However, it wasn’t all that surprising as AMD is a growth company, and its valuation didn’t scare me as the company is releasing and preparing to release products that will see considerable earnings and revenue growth, as well as gains in marketshare from its competitors.

But had I not taken a look at the technical side of things, I wouldn’t have seen that there was a pattern in the chart telling me that the price could soon be lower than it was at the time, or just under $14. A 28% difference from where the price is today.

This pattern couldn’t have told me what the headlines would be that would send the price of AMD down to $10, but it did give me good reason to believe that the price would fall to the level its at now.

Now, having said all this, I still don’t think AMD is a buy just yet. Here’s why.

Source: TradingView.

Looking at AMD’s rise from the beginning of 2016 through March 2017, the price AMD is at now is just below the 38.2% Fibonacci retracement, which is the first level one would look at for technical support. However, after such a significant advance, it’s often the case that the share price will make an even deeper correction which makes me think we could see the price fall to lower levels. This means we could see the price around $8, or even $7 or $5, before it begins a new uptrend.

So what’s there to do on AMD? As always, do your due diligence and if AMD looks like a company that you’d like to add to your portfolio considering its growth prospects, then wait to see if this $10 level holds. If it continues to fall, then watch for the price to hit the retracement levels shown in the chart above. If the price starts to rise, then a new uptrend has begun.

And remember, if AMD teaches us anything it’s that it pays to look at things from a technical perspective along with fundamental analysis before taking a position. It could mean the difference between buying a good company at an okay price and buying one at a great price.