Advanced Micro Devices, Inc. (AMD) shares posted dramatic gains between April and September 2018, more than tripling in price into a 12-year high in the low $30s. The stock then got cut in half into late October, undermined by a broad-based decline that dropped the PHLX Semiconductor Index (SOX) to a 52-week low. An oversold bounce into mid-November has generated a wave of bottoming calls, but this volatile issue has now entered a price zone that should generate profitable short sales

This stock is no stranger to feast and famine-like price action, carving three parabolic uptrends since the end of the 1990s. Equally vicious declines ended the first two of those vertical events, while the third incarnation, between 2015 and 2018, could now yield an identically bearish outcome. The chip maker's shares could drop into the single digits if that happens, perhaps before the new decade starts in 14 months.

The cryptocurrency crash is partly responsible for AMD's downward spiral, after a massive revenue surge generated by devotees loading up on high-powered graphics cards to mine digital currencies. Bitcoin fell 70% into the February 2018 low and has been testing that level for more than four months, wiping out the last traces of bullishness while undermining sales for Advanced Micro Devices.

AMD Long-Term Chart (1996 – 2018)

The stock posted a four-year low at $5.13 in 1996 and took off in a two-legged uptrend that accelerated into the upper $40s at the turn of the millennium. It posted an all-time high at $48.50 in June 2000 and turned sharply lower with the tech universe, carving an Elliott five-wave decline into an 11-year low near $3.00 in October 2002. An equally vigorous uptrend retraced the majority of those losses into 2006, topping up about six points below the prior high.

A brutal downtrend into 2009 ended at a 30-year low, highlighting the stock's dramatic boom-bust cycles while offering a modest buying opportunity, ahead of a bounce that stalled just above $10.00 in 2010. Price action spent the next five years testing the prior decade's low while carving a triple bottom reversal that generated a fresh uptrend in the fourth quarter of 2015. This buying impulse caught fire, lifting into the mid-teens in early 2017.

AMD Short-Term Chart (2017 – 2018)

A June 2018 breakout stalled at the 18-year trendline of lower highs in the mid-$30s in September, giving way to a high-volume decline that posted a massive sell gap between $23 and $20 in late October. The stock undercut the 200-day exponential moving average (EMA) into month end and bounced, entering the gap on Nov. 2. It has made modest upside progress since that time but still hasn't filled the big hole.

Price action since September has carved a potential Elliott five-wave decline, following the fractal behavior of past downturns. The gap cut through the 50% retracement of the rally off the April 2018 low, raising the odds that it will mark a continuation gap at the midpoint of the current downtrend. Meanwhile, the bounce into November looks like a reactive fourth wave that will set off reliable short sale signals as price approaches the fill level and 50-day EMA.

Those resistance levels have aligned with the 50% and 61.8% retracements of the potential third wave, while weekly and monthly stochastics oscillators remain stuck in intermediate and long-term sell cycles. This bearish set-up may trigger a short sale entry signal through a high-volume down day or an intraday reversal at or below $23. A fifth wave downside target will then be located at the 78.6% retracement near $14.50, more than 30% below the most recent closing price.

The Bottom Line

Advanced Micro Devices stock may end an oversold bounce in coming sessions and drop to new lows in the mid-teens. 

<Disclosure: The author held no positions in the aforementioned securities at the time of publication.>