Advanced Micro Devices, Inc. (AMD) beat earnings estimates on Jan. 28, but weak guidance had the stock slumping before it recovered. The stock slipped to $46.10 on Jan. 29 on post-earnings weakness but then stabilized, holding its monthly pivot for February at $46.86 as the month began. The stock popped to $54.85 on Feb. 12, with its weekly risky level at $55.48.
AMD stock is extremely overvalued with a P/E ratio of 102.75 without paying a dividend, according to Macrotrends. Thus, this is not a stock for value investors. AMD shares closed Wednesday, Feb. 12, at $53.80, up 17.3% so far in 2020. The stock set its all-time intraday high of $54.85 on Feb. 12. The stock is up 235.6% since trading as low as $16.03 on Dec. 26, 2018.
The daily chart for AMD
The daily chart for AMD shows that the stock has been above a "golden cross" since June 13, 2018, when the 50-day simple moving average rose above the 200-day simple moving average to indicate that higher prices would follow. This tracked the stock to its Feb. 12 all-time high of $54.85. Note the numerous opportunities to buy the stock on weakness to its 200-day simple moving average beginning on Oct. 29, 2018, when the average was $16.92.
The close of $45.86 on Dec. 31 was an important to my proprietary analytics. AMD's annual value level is $26.51. The first half semiannual value level is $40.41. The first quarter value level is $45.50. The close of $47.00 on Jan. 31 was another input to my analytics, and the monthly value level for February is $46.86. This week's risky level is $55.48.
The weekly chart for AMD
The weekly chart for AMD is positive but overbought, with the stock above its five-week modified moving average of $48.22. The stock remains well above its 200-week simple moving average, or "reversion to the mean," at $18.39. Note how the long-term bull market for AMD began from this moving average back in April 2016, when the average was $3.09.
The 12 x 3 x 3 weekly slow stochastic reading is projected to slip to 83.96 this week, still above the overbought threshold of 80.00. During the week of Jan. 24, this reading was 92.68, well above the 90.00 threshold that put the stock in an "inflating parabolic bubble" formation.
Trading strategy: Buy AMD stock on weakness to the monthly and quarterly value levels at $46.86 and $45.50, respectively, and reduce holdings on strength to its weekly risky level at $55.48.
How to use my value levels and risky levels: The closing prices of stocks on Dec. 31, 2019, were inputs to my proprietary analytics. Quarterly, semiannual, and annual levels remain on the charts. Each calculation uses the last nine closes in these time horizons. Monthly levels for February were established based on the Jan. 31 closes. New weekly levels are calculated after the end of each week. New quarterly levels occur at the end of each quarter, while semiannual levels are updated at mid-year and annual levels remain in play all year long.
My theory is that nine years of volatility between closes are enough to assume that all possible bullish or bearish events for the stock are factored in. To capture share price volatility, investors should buy shares on weakness to a value level and reduce holdings on strength to a risky level. A pivot is a value level or risky level that was violated within its time horizon. Pivots act as magnets that have a high probability of being tested again before their time horizon expires.
How to use 12 x 3 x 3 weekly slow stochastic readings: My choice of using 12 x 3 x 3 weekly slow stochastic readings was based upon backtesting many methods of reading share-price momentum with the objective of finding the combination that resulted in the fewest false signals. I did this following the stock market crash of 1987, so I have been happy with the results for more than 30 years.
The stochastic reading covers the last 12 weeks of highs, lows, and closes for the stock. There is a raw calculation of the differences between the highest high and lowest low versus the closes. These levels are modified to a fast reading and a slow reading, and I found that the slow reading worked the best.
The stochastic reading scales between 00.00 and 100.00, with readings above 80.00 considered overbought and readings below 20.00 considered oversold. A reading above 90.00 is considered an "inflating parabolic bubble" formation that is typically followed by a decline of 10% to 20% over the next three to five months. A reading below 10.00 is considered "too cheap to ignore," which typically is followed by gains of 10% to 20% over the next three to five months.
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Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.