(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)

The stock of Advanced Micro Devices Inc. (AMD) has now more than doubled since the beginning of April. Shares of the chipmaker have climbed to more than $25 from only $9.50 in the past few months. Shares may have risen too far too fast and may be about to plunge by as much as 20% based on technical analysis.

The number of traders betting that AMD's stock will fall hit an all-time high in April, as short interest surged to more than 192 million shares. April was also the point when AMD's stock started to explode higher. It was when AMD reported blowout first-quarter results, crushing analysts’ earnings and revenue estimates. Then in July, the company reported second-quarter results, again smashing analysts’ forecasts. Earnings beat estimates by more than 10%. Shares continued to rise, and it sent the shorts scrambling, perhaps sending shares even higher in a rush to buy back the stock they had shorted. Since peaking in April, the number of shares short has plunged by more than 24% through Aug. 15. 

Nearing Resistance

 

Shares broke out on Aug. 18, rising above technical resistance at $20. Since then the stock has risen a stunning 27% in only six trading sessions. But shares are now hitting a level of technical resistance that goes back to October 2006: around $26. It may prove to be too challenging for the price to rise above. Additionally, there are many gaps in the chart, created by the sudden rise in the stock price. Should those gaps begin to get filled, shares could fall as low as $20.90, a drop of almost 20%.

Shares Are Overbought

The relative strength index (RSI) is also at overbought levels at 86—a level of 70 or higher is overbought. Since 2004 the RSI in AMD has only hit a level this high four prior times. Each time the stock either fell or consolidated for a period, this time may not be different.

 

Shorts Driving the Price Up?

One reason the price may be surging: The short sellers are now fleeing the stock and buying back shares after taking massive losses. AMD's short interest hit its highest level ever in April, representing more than 26% of the float, a tremendous amount. When the stock price started moving higher, the short interest began to fall. As of Aug. 15, short interest has declined to 146 million shares. In the period between July 31 and Aug. 15, the number of shares short fell by 21 million shares, almost 13%. But should the short sellers begin to slow their covering or stop buying shares back, the stock price may drop as the number of buyers in the market falls. 

AMD Short Interest Chart

AMD Short Interest data by YCharts

It would seem the sudden surge in the stock's price may be due to the combination of improving fundamentals and the shorts scrambling to get out of the stock. Now the big question is: Will shares fall, as the chart suggests, or continue to rise and squeeze the shorts even more?

Michael Kramer is the founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdingsInformation presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.

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