After a 20% Pullback, AMD Is Setting Up for Another Run

One stock that has benefited from the AI boom this year is chipmaker Advanced Micro Devices (AMD)…

Having steadily risen since the start of the year, AMD’s rally accelerated in May. It gained 60% in the space of a month.

That peak in May was more than double AMD’s stock price at the start of the year.

However, when we checked out AMD in early June (red arrow in the chart below), it showed signs of overheating. It had dropped 10% from its May 30 high in just a few days.

Then, after rallying to a fresh high, sagging momentum pulled AMD lower again.

Now AMD is trying to rally once more. Today, I want to see how things could play out from here…

A Clear Divergence

The October low in the chart below represents the end of AMD’s year-long downtrend. From top to bottom, AMD lost two-thirds of its value.

However, AMD built a base and rallied. The Relative Strength Index (RSI) steadily climbed (red line) from oversold territory (lower grey dashed line) too.

Advanced Micro Devices (AMD)

Source: eSignal

After a pullback, AMD made a higher low in December and then a higher high in February.

This ascending bullish pattern of higher lows and higher highs continued right throughout AMD’s rally.

You can see the much stronger rally up to AMD’s recent peak at ‘4’ compared to the previous three legs up to ‘1,’ ‘2,’ and ‘3.’

Our two Moving Averages (MAs) also show the size of that recent move. The 10-day MA’s rally (red line) above the 50-day MA (blue line) at ‘4’ is also much larger than the previous three…

Each of AMD’s peaks retraced, though. And the RSI reversed (red circles) from overbought territory (upper grey dashed line).

However, the difference with the recent peak at ‘4’ is the clear divergence pattern between AMD’s stock price and the RSI…

Take another look:

Advanced Micro Devices (AMD)

Source: eSignal

As you can see, AMD made a fresh higher peak after that initial false high on May 30 (upper orange line). But the downtrend in momentum (lower orange line) eventually pulled it lower.

That reversal pattern produced a sharp 20% fall.

Since then, AMD has been trying to rally as the RSI zigzags around support (green line).

So what am I looking for next?

It Hinges on Buying Momentum

The RSI dipped below support late last month. Yet recently it has been tracking in the upper half of its range.

The longer the RSI can remain in this upper band, the stronger AMD’s next up leg will be. The next test for AMD’s nine-month rally is for it to make a higher high at what would become ‘5.’

However, that all hinges on sustained buying momentum. Any clear reversal in the RSI will likely mean an end to AMD’s rally.

The other thing to keep a watch on is our two MAs…

After dipping as AMD reversed from ‘4,’ the 10-day MA has recently turned higher.

For AMD’s next up leg to take hold, we’ll want to see the 10-day MA start to accelerate above the 50-day MA.

Regards,

Larry Benedict
Editor, Trading With Larry Benedict

Mailbag

One subscriber shared his comments on our recent oil piece…

Thoughts on where oil prices are headed. While the technical picture is rosy and indicative of further upside, the concern will be on the fundamental side.

Oil prices will be governed by where the economy is going. Some feel that the economy may be headed for a soft landing, which might explain the current price action. Others feel that Fed’s further fighting could bring about a recession, which would cause oil prices to roll over.

There is a third line of thinking that we end up with stagflation (as in ’70s). In the end, it seems we need more clarity on which scenario will likely play out before calling oil price direction.

– John M.

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