Chip maker Advanced Micro Devices announced that it expects second-quarter revenue to drop by 11 percent from the prior quarter. The usual suspects, Europe and China are blamed for soft sales.
Based on my experience with gap-downs following earnings warnings similar to AMD's, the odds favor greater downside, with Wednesday or Thursday marking the short-term low. It's not quite time to wish for a price above the closing before earnings of $5.50, but AMD does have strong support near $4.50.Friday or early next week will likely find bargain hunters picking up shares cheap to flip over. If Thursday appears to be closing below Wednesday's low, I may join with the bargain hunters for a quick hit-and-run weekend carryover. Bargain hunters and short-sellers covering positions could push the price up about 50% in relation to the gap-down price. Looking at the chart, I expect short-term resistance near $5.55. Round numbers often attract like a price magnet and repel, causing a bounce. Expect a lot of volume to trade near $5.25 a share Tuesday, but also be prepared for a closing under the opening price, and more than a 20% chance of a close under $5.
If you are looking for the drop to signal a buying opportunity, you are likely going to find the end of the day Wednesday or Thursday better than Tuesday. There is no hurry buying the dip with AMD. Stocks dumped as a result of profit warnings usually take a full two good earnings quarters to recover. Take your time and do your homework before allocating capital here. Look for the second break above $6 as the one that "sticks." Want to see a classic miss earnings result a few weeks after the fact? Take a look at Dell or HP. Dell disappointed and traded from $15 down to the current $12.40. Also, take close note of the next few days after earnings. This is a classic pattern I see often, and you can, too. Simply use your software to look at charts from the past few quarters and review the ones that gapped down the next day. The high placed a couple of days after the gap down in Dell is now resistance.
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