Two steps forward and one step back.
AMD is off today following news that Microsoft Corp. (MSFT) - Get Report is suspending some updates to its Windows operating system that were meant to patch the Meltdown vulnerability that could be exploited in AMD, Intel (INTC) - Get Report , and ARM Holdings' chips.
Despite the correction, AMD is still up almost 15% since the calendar flipped to 2018, boosted by investors' speculation that the Meltdown and Spectre vulnerabilities might incite customers to diversify chip vendors. Currently, Intel owns around 80% of the microprocessor market, and more than 90% of chips for laptops and servers, the most attractive corner of the market right now.
In the context of that double-digit up-move in AMD, Tuesday's drop looks more like a buying opportunity than a cause for concern. So, to figure out exactly how to trade it, we're turning to the chart for a technical look.
2017 wasn't AMD's year. While the broad market rallied hard last year, AMD fell flat, shedding around 9.3% of its market value. But the bulls' fortunes could finally be about to change.
Since November, AMD has been forming a classic bullish reversal setup, an indication that buyers are finally stepping back into the stock in a meaningful way. The pattern in play for AMD right now is an inverse head and shoulders setup, a price pattern that indicates exhaustion among sellers. The inverse head and shoulders in AMD triggered a buy last week, when the first chip vulnerability reports around Intel emerged, and AMD is holding onto that breakout here.
That buy signal is confirmed by relative strength, the indicator down at the bottom of AMD's chart. While AMD's relative strength line indicated some prolonged underperformance as recently as this fall, that gauge flipped at the start of December, signaling that AMD has actually started outperforming the rest of the stock market for the first time since last spring.
From here, the path is more or less clear to longer-term resistance up at $14.50.
- Microsoft Halts 'Spectre' and 'Meltdown' Patches After AMD-Powered Devices Lock
- How Intel's Chip Flaw Could Affect Amazon, Microsoft and Others in the Cloud
- What Intel's Chip Disaster Means for its Stock and AMD's
If you decide to be a buyer of AMD here, risk management remains key. Tuesday's 4% drop is a reminder that AMD is no stranger to volatility. For that reason, it's a good move to park a protective stop on the other side of the 50-day moving average, a price level that's been acting as a decent proxy for the neckline level that shares broke out above last week.
If AMD retraces below the 50-day, you don't want to own it anymore.
Meanwhile, shares look more likely to continue to charge higher and test $14.50 this winter.
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This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.