A month and a half ago, on September 11th, AMD stock was hovering around $30 a share following a spectacular 190% rally in 2018. Optimism was running high, but knowing that semiconductors is an extremely cyclical industry, we thought it was time to “be careful”.
Of course, the stock did not start declining immediately after our warning. Two days later, it added another 13% to reach $34.14 a share on September 13th. It wasn’t Friday, but that day still brought bad luck to AMD stock investors. It marked the beginning of a 30.8% drop culminating on October 19th. And if losing almost a third of its market cap in less than 40 days wasn’t bad enough, the Elliott Wave structure of this pullback suggests more pain lies ahead. Take a look.
The weakness from $34.14 has formed a textbook five-wave impulse pattern, labeled 1-2-3-4-5. In addition, two sub-degrees of trend are visible within wave 3.
For those new to Elliott Wave theory, impulses develop in the direction of the larger trend. Spotting an impulse to the south means that once the corresponding three-wave recovery in wave (2/B) is over, another five-wave sequence can be expected. Wave (3/C) down has the potential to drag AMD stock even lower.
But first we should get ready for a corrective rally in wave (2/B) to roughly $30 a share. The short-term positive outlook receives further support by the MACD indicator, which shows a bullish divergence between waves 3 and 5 of (1/A).
In our opinion, wave (2/B) is going to give investors a chance to evacuate before the bears drag AMD stock to $20 or lower in the (3/C). The fact that other semiconductor companies such as Nvidia and Micron are also retreating after prolonged rallies suggests that maybe the tide is turning for the entire industry.
“It’s only when the tide goes out that you discover who’s been swimming naked” -Warren Buffett
Did you like this analysis? Our Elliott Wave Video Course can teach you how to uncover similar opportunities yourself!