NOT SO BULLISH CASE
AMD today announced decent earnings and had a very good bounce off a small decline recently. Aided by less hawkish noises from the Fed mulling a 'soft landing', the market lapped it up - with AMD rallying almost 10% for the day. The reversal was quick and pronounced. With perhaps more juice to squeeze out of this green lime, it would need to reclaim and begin and sustain a new uptrend above $120 if the bull-trend is to continue.
BEAR CASE
With all that being said, there are many more reasons to be bearish . I therefore favour a short position in the region of $105, with a $120 stop-loss. Here is why:
1. TOP OF EXPONENTIAL CHANNEL
Firstly, there are an awful lot of similarities here when comparing us to May 1985. Beginning a recent breakdown below the 50 week MA trend line in the main chart, after a parabolic decade. We're also moving downwards generally from the top of the exponential channel. In the past, these movements have coincided with significant corrections for this stock as we'll explore. We recently lost the 50 MA, we've now just re-tested the underside of that, providing us with a great risk-reward entry of 8:1.
The bottom of the channel currently sits at $13 and a prior horizontal pivot point (dotted line) of $9 should also provide good support. Getting all the way to $13 would still represent a 82% decline from today's prices and 88% from all-time highs.
2. RSI BEAR ZONE
You'll also notice the 2nd indicator below, showing the RSI has just commenced and triggered a new bearish zone. Dropping below 40 on the weekly chart for the first time since November 2017. In future posts I will go into further detail as to how & why these custom indicators work. In the absence of this, it's still abundantly clear to see from prior periods in the RSI bear zone, that these have triggered significant declines over the years:
3. FRACTAL
Taking the same bar pattern from the 1975 to 1985 period and condensing it down into fewer years - we have generated similar logarithmic gains from 6 years instead of 10. This would also suggest a quicker but still slow'ish grind to the downside, potentially to as low as $18 by December 2025.
4. FUNDAMENTALS
With such huge shipping disruptions forthcoming in Asia, the market may still be unaware of the forthcoming impact on availability of product and therefore their manufacturing/foundry capabilities for the quarters ahead. On AMD's website discussing Supply Chain Responsibility, they reference that 80% of their manufacturing is done in Asia still to this day. They are very much dependent upon Taiwanese subcontractors. Even without any further deterioration in the conditions and the lockdowns in that part of the world, I would argue this as well as any other geopolitical issues have not been priced in to their forward performance. AMD is still priced to perfection.
Below are some of the risks they mention on their annual report, including many others (removed for readability):
SUMMARY
As uplifting as the above sounds, there's an opportunity here for us. Let's come back and revisit this one in 6 months time. Even if you're not short, avoiding such a bad time to go long is advised! Crossing below the top of the green channel recently indicated to take profits and now we've just got a sell signal...so it's time to take it...
AMD today announced decent earnings and had a very good bounce off a small decline recently. Aided by less hawkish noises from the Fed mulling a 'soft landing', the market lapped it up - with AMD rallying almost 10% for the day. The reversal was quick and pronounced. With perhaps more juice to squeeze out of this green lime, it would need to reclaim and begin and sustain a new uptrend above $120 if the bull-trend is to continue.
BEAR CASE
With all that being said, there are many more reasons to be bearish . I therefore favour a short position in the region of $105, with a $120 stop-loss. Here is why:
1. TOP OF EXPONENTIAL CHANNEL
Firstly, there are an awful lot of similarities here when comparing us to May 1985. Beginning a recent breakdown below the 50 week MA trend line in the main chart, after a parabolic decade. We're also moving downwards generally from the top of the exponential channel. In the past, these movements have coincided with significant corrections for this stock as we'll explore. We recently lost the 50 MA, we've now just re-tested the underside of that, providing us with a great risk-reward entry of 8:1.
The bottom of the channel currently sits at $13 and a prior horizontal pivot point (dotted line) of $9 should also provide good support. Getting all the way to $13 would still represent a 82% decline from today's prices and 88% from all-time highs.
2. RSI BEAR ZONE
You'll also notice the 2nd indicator below, showing the RSI has just commenced and triggered a new bearish zone. Dropping below 40 on the weekly chart for the first time since November 2017. In future posts I will go into further detail as to how & why these custom indicators work. In the absence of this, it's still abundantly clear to see from prior periods in the RSI bear zone, that these have triggered significant declines over the years:
- 86% - May 1985 to November 1990 (5.5 years)
- 86% - July 2000 to October 2002 (2.5 years)
- 92% - May 2006 to December 2008 (2.5 years)
3. FRACTAL
Taking the same bar pattern from the 1975 to 1985 period and condensing it down into fewer years - we have generated similar logarithmic gains from 6 years instead of 10. This would also suggest a quicker but still slow'ish grind to the downside, potentially to as low as $18 by December 2025.
4. FUNDAMENTALS
With such huge shipping disruptions forthcoming in Asia, the market may still be unaware of the forthcoming impact on availability of product and therefore their manufacturing/foundry capabilities for the quarters ahead. On AMD's website discussing Supply Chain Responsibility, they reference that 80% of their manufacturing is done in Asia still to this day. They are very much dependent upon Taiwanese subcontractors. Even without any further deterioration in the conditions and the lockdowns in that part of the world, I would argue this as well as any other geopolitical issues have not been priced in to their forward performance. AMD is still priced to perfection.
Below are some of the risks they mention on their annual report, including many others (removed for readability):
- Global economic and market uncertainty may adversely impact our business and operating results.
- The loss of a significant customer may have a material adverse effect on us.
- The ongoing novel coronavirus (COVID-19) pandemic could materially adversely affect our business.
- The semiconductor industry is highly cyclical and has experienced severe downturns.
- IT outages, data loss, data breaches and cyber-attacks could compromise our intellectual property or other sensitive information.
- Uncertainties involving the ordering and shipment of our products could materially adversely affect us.
- If we lose Microsoft ... our ability to sell our products could be materially adversely affected.
- If we cannot adequately protect our technology or other intellectual property... we may lose a competitive advantage and incur significant expenses.
- We rely on third parties to manufacture our products, and if they are unable to do so on a timely basis in sufficient quantities and using competitive technologies, our business could be materially adversely affected.
- If essential equipment, materials, substrates or manufacturing processes are not available to manufacture our products, we could be materially adversely affected.
SUMMARY
As uplifting as the above sounds, there's an opportunity here for us. Let's come back and revisit this one in 6 months time. Even if you're not short, avoiding such a bad time to go long is advised! Crossing below the top of the green channel recently indicated to take profits and now we've just got a sell signal...so it's time to take it...