Nvidia (NVDA) recently hit a trillion-dollar valuation. So investors have been bidding up other stocks they believe can cash in on the AI boom.

One of those is Advanced Micro Devices (AMD)…

Despite releasing lackluster results at the start of May, AMD has rallied 60% in the last month. And it has more than doubled since the start of the year.

But after such a dramatic rise, AMD is showing signs of overheating. Just last week, it pulled back 10% from its May 30 high.

So today, I want to check out AMD’s price action and talk about what I see coming next…

Taking Out a Previous High

On the left-hand side of the chart below, you can see the tail end of AMD’s downtrend last year. That massive down move saw AMD lose two-thirds of its value from its late 2021 all-time high.

But after bottoming out in October, AMD began to steadily climb. As the chart shows, AMD bullishly made a series of higher lows and higher highs…

Advanced Micro Devices (AMD)

Source: eSignal

The first of those higher lows appeared in January (‘1’ on the chart). After that, AMD’s rally accelerated as the Relative Strength Index (RSI) broke through resistance (green line) and gained traction in the upper half of its range.

Sustained positive momentum like this is key to maintaining a rally.

The other bullish pattern that underpinned the rise was the action of our Moving Averages (MAs)…

The 10-day MA (red line) broke above the 50-day MA (blue line), with both then tracking higher. That confirmed AMD’s uptrend.

After making another higher low at ‘2,’ AMD bounced despite releasing disappointing Q1 earnings. That was due to news of its AI collaboration with Microsoft.

However, the rally was starting to stall when we last checked out AMD on May 17 (red arrow)…

I noted that for AMD’s rally to resume, the RSI needed to remain in the upper half of its range.

The next test for AMD would then be to take out its March high ($102.43).

The other thing we were watching was our MAs…

The 10-day MA had just broken above the 50-day MA. So we would need to see this accelerate higher as further confirmation of AMD’s rally.

And, as you can see, that is how things played out…

Take another look:

Advanced Micro Devices (AMD)

Source: eSignal

Not only did AMD hit a new high, but its recent May 30 peak was a near-30% premium to the previous March high.

However, that surge also put the RSI well into overbought territory (red circle).

So what am I looking for around here?

Catching the Countertrend

You can see on the chart that the RSI’s inverse ‘V’ coincided with AMD peaking and reversing lower.

What happens next from here will be key…

If the RSI continues lower, as it did from its previous highs at ‘A,’ ‘B,’ and ‘C,’ then we can expect AMD’s retracement to grow stronger. The RSI falling through support could see AMD back under $110.

We’re also looking closely at our two MAs…

As the chart shows, the 10-day MA has accelerated strongly above the 50-day MA… but it looks to be peaking.

The 10-day rolling lower from here would add further weight to any emerging down move.

Regards,

Larry Benedict
Editor, Trading With Larry Benedict

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