To The Moon

Introduction

$Advanced Micro Devices(AMD)$ has been on a tear in recent weeks, rising for more than 27% for the month of march. However good things don’t last long and in this post, I will share why I think AMD rally is probably going to end soon (mainly from a technical analysis stand point).

About AMD

I think AMD needs no further introduction as it is a very popular stock among traders. AMD is a semiconductor company that operates globally in four segments: Data Center, Client, Gaming, and Embedded. It offers a range of products such as x86 microprocessors, graphics processing units (GPUs), chipsets, data center, and professional GPUs, and embedded. All these are the fundamental building blocks for Artificial Intelligence (AI).

AMD's Stock Current State

AMD closed at $100.28 yesterday, and according to the Tom Demark TD9 setup, the bullish count is at 8 (see chart below) and if the count reach 9 today, the stock is likely to reverse its recent rally. Based on the Relative Strength Index (RSI), the stock has been in the overbought region since last Thursday. A RSI above 70 indicates that the stock is overbought.

AMD's TD count is at 8

Why is AMD surging?

The surge in AMD's price is due to the spotlight on Artificial Intelligence (AI), which is brought about by the capability of Open AI’s Chatgpt which has exceeded the expectations of many. Similarly, $NVIDIA Corp(NVDA)$ is also in the overbought region, as the stock keeps surging as it just held its GPU Technology Conference (GTC), a global AI conference for developers that brings together developers, engineers, researchers, inventors, and IT professionals to highlight how its GPU can help companies build their own AI models. This catalyst, together with the anticipation that Fed is ending its interest rate hike is pushing this rate sensitive growth stock above it’s resistance level.

NVDA's day chart

AMD's Previous High

Zooming out on AMD's day chart, we can see that the last time AMD closed above 100 was in August of last year. The stock barely stayed above 100 for a few days before going down below 100. Prior to the high in August 2022, the stock broke above 100 in June 2022 but only did so for a few days.

AMD day chart from April 2021

TD9 Sequence Indicator

The TD9 setup is a technical analysis tool developed by market analyst Tom DeMark. It is based on identifying patterns in price movements that suggest a potential trend reversal. A TD9 setup occurs when a market trend has reached a point of exhaustion and is likely to reverse in the opposite direction. The setup is triggered when there are nine consecutive bars on a price chart that close higher or lower than the bar four periods earlier. This pattern suggests that the market has become overbought or oversold, and that a reversal is likely to occur.

Perfect Sell for AMD?

Looking at AMD's TD9 sequence indicator, we can see that it is currently at the count of 8 (first chart in the post), indicating a potential perfect sell. If AMD can close above 100.28, then the TD count of 9 will be complete.

For the perfect sell to form, the highs of the 8th and 9th candle must be higher than the highs of the 6th and 7th candle, Meaning to say, yesterday’s high (102.43) must be higher than that on Tuesday (99.46), this criteria has already been fulfilled.

Therefore we just need today’s high need to be higher than that of Thursday (101.7) for the perfect sell to form. There is a high probability that the market will reverse in the opposite direction.

The number ‘9’ which may happen today is ideal for entering a trade opposite to the established trend. The stop-loss next week should be above the highs of today. If the pattern plays out, the pullback will be significantly strong in during the first 3-4 candles, (i.e. the first half of next week) after the confirmation of number ‘9’.

Based on the TD9 sequence indicator and the stock's high RSI, it seems that a perfect sell for AMD may be on the horizon. However, it is important to note that no indicator is 100% accurate, and there is always a possibility of a false signal.

AMD’s 5 min Chart

From the day chart. we can see that the region around 100 is a very critical price level. If we zoom in to the 5 mins chart yesterday, we can see the resistance level of 101 has been penetrated and acted as the support level for 1st of half of the day trading before it broke down together with the broader market.

AMD's 5 min chart

My Trades In View of A Possible Reversal

Based on the above, a reversal or pullback is likely to happen today or next week. Therefore, my trades will likely involved be buying PUT options expiring next week or 2 weeks from now at the strike price of 105 $AMD 20230331 105.0 PUT$. I choose 105 because the last high in August 2022 was 104.5.

If AMD rallied again strongly today, I may consider selling some call options at the strike price of 111 $AMD 20230406 111.0 CALL$ expiring 2 weeks from now as the next resistance level should be around 110 based on the day chart (see below). The premium for these call options would need to go above $1 today for me to consider selling them.

AMD's resistance levels

Conclusion

In conclusion, the TD9 sequence indicator and AMD's RSI both suggest that a perfect sell may be on the horizon. However, it is important to note that AMD's stock price has always been volatile, and trading in it comes with a level of risk. It is crucial to have a solid understanding of the market and technical indicators before investing in AMD.

Do like and comment if you think AMD is overbought and pullback is coming. Thank you

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